How am I taxed if I sell my "main home"?

Usually, the home you live in most of the time is your main home and can be a:

• House

• Houseboat

• Mobile home

• Cooperative apartment

• Condominium

EXCLUSION OF GAIN

If you have a gain from the sale of your main home, you may be able to exclude from income up to $250,000 of the gain ($500,000, for certain married taxpayers filing a joint return). The exclusion may be allowed each time you sell or exchange your main home, but generally no more frequently than once every two years.

To be eligible for the exclusion*, you must meet the "ownership and use tests." You MUST have:

REDUCED EXCLUSION*

A "reduced exclusion" applies to taxpayers who do NOT meet the "ownership and use tests" due to a change in health or place of employment. There is also a provision in the law that a reduced exclusion may apply due to "unforeseen circumstances." The sale of a main home will be considered as occurring primarily because of “unforeseen circumstances” if any of the following events occur during the taxpayer’s period of use and ownership of the residence:

• death,
   
• divorce or legal separation,
   
• becoming eligible for unemployment compensation,
   
• a change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses,
   
• multiple births resulting from the same pregnancy,
   
• damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism, and
   
• condemnation, seizure or other involuntary conversion of the property.

Other circumstances may be considered "unforeseen" solely at the discretion of the IRS Commissioner.

DEPRECIATION OF MAIN HOME AFTER MAY 6, 1997

If you were entitled to take depreciation deductions because you used your home for business purposes or as a rental property, you CANNOT exclude the part of the gain equal to any depreciation allowed or allowable AFTER May 6, 1997.

SALE OF MAIN HOME ACQUIRED IN A LIKE-KIND EXCHANGE

Effective for sales or exchanges after October 22, 2004, the exclusion of gain from the sale of a principal residence is inapplicable to property acquired in a like-kind exchange during the five-year period before the sale. Thus, the exclusion of gain will NOT apply if the principal residence was acquired in a like-kind exchange in which any gain was not recognized within the previous five years.

REDUCED EXCLUSION OF MAIN HOME FOR NON-QUALIFYING USE

Beginning January 1, 2009, taxpayers will not be allowed to exclude any gain attributable to a "nonqualified use." This will prevent taxpayers from selling a second home or vacation home and excluding all the gain even if they meet the two-out-of-five years ownership and use tests.

For purposes of determining the amount of gain that is allocated to periods of nonqualified use, gain will be allocated based on the following ratio:

1. The aggregate periods of nonqualified use during the period the property was owned by the taxpayer.

2. The period the property was owned by the taxpayer.

The amount of gain allocated to periods of nonqualified use is the total amount of gain multiplied by a fraction (1) the numerator of which is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer, and (2) the denominator of which is the period the taxpayer owned the property.

A period of nonqualified use is any period beginning January 1, 2009, during which the property is NOT used as the principal residence of the taxpayer, the taxpayer's spouse, or former spouse. Since the definition of a period of nonqualified use doesn't include any period before January 1, 2009, a taxpayer can avoid this new rule if he moves into another residence he owns and makes it his principal residence before January 1, 2009. A period of nonqualified use does not include any portion of the five-year testing period which is after the last date that the property is used as the principal residence. Therefore, any period after the last date the property was used as the principal residence (regardless of use during that period) is not taken into account in determining periods of nonqualified use. This new law is effective for sales and exchanges beginning January 1, 2009.

THE MILITARY TAX RELIEF ACT OF 2003 (HR3365) (MFTRA)

This special election is retroactive. It is effective for sales made after May 6, 1997.

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