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How am I taxed if I sell my "main home"? |
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DEFINITION OF MAIN HOME Usually, the home you live in most of the time is your main home and can be a:
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:
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:
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)
The new law creates a special exception to the "two-out-of-five year rule"
for uniformed and foreign service personnel called to active duty away
from home. They may elect to suspend the five-year test period. The
maximum length of the suspension is 10 years and it may only be made with
respect to one property. If the election is made, the five-year period
ending on the date of the sale of a principal residence does not include
any period up to 10 years during which the serviceman or woman, his or her
spouse, is on qualified official extended duty. An election may be revoked
at anytime. The new
election is available to members of the Armed Forces (Army, Navy, Air
Force, Marine Corps, and Coast Guard), Commissioned Corps of the National
Oceanic and Atmospheric Administration, Commissioned Corps of the Public
Health Service, and the Foreign Service. "Away from
home" is defined as “qualified official extended duty” while serving at a
duty station that is at least 50 miles from the taxpayer’s principal
residence or while residing in government quarters under government
orders. “Extended duty” is any period of active duty pursuant to a call or
order to such duty for a period in excess of 90 days or for an indefinite
time. This
special election is retroactive. It is effective for sales made after May
6, 1997. |
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Click here to return to "Frequently Asked Tax Questions" |
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