Selling a Home? Here are Some Strategies You Should Know

One of the reasons your clients hire you is to help them save money. If they own a home, there are a number of nuanced but perfectly legal ways for them to do so. You just need to be aware of these expert strategies.

Jul 21st 2020
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Sellers who suffer losses get no deductions
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Sellers who suffer losses get no deductions

What follows are reminders for sellers on how to sidestep pitfalls and take maximum advantage of frequently missed, perfectly legal opportunities that can save many thousands of dollars.

Most people who sell their principal residences are able to sidestep capital gains taxes on the profits. Married couples filing jointly can exclude—that is, escape—taxes on as much as $500,000 of gains. Single filers get to exclude as much as $250,000. (Internal Revenue Code Section 121)

The key requirement. Seller Olivia must own and live in the property as her principal residence for at least two out of the five years before the sale date. Also, at least two years must have elapsed since she last used the profit exclusion.

Some strategies. The Internal Revenue Service says that Olivia doesn’t have to actually live in her principal residence when she buys it or when she sells it. The Internal Revenue requires only that she passes the use test as of the sale date.

Example. The IRS acknowledges that Olivia can rent out her home without forfeiting her exclusion. As the home needn’t be her principal residence at the sale date, she can live in it for at least two years and then rent it out for close to three years before she sells and takes the exclusion.

The agency also agrees that it’s okay for Olivia to live in it for the first and last years during the five-year period that ends on the sale date. These IRS-blessed maneuvers allow her to derive a greater benefit from the exclusion in the event that she decides not to sell now because she anticipates additional appreciation and is willing to take her chances on being a landlord.

Example. Olivia could sell now for $600,000 and realize a gain of $100,000 that’s erased by the profit exclusion. Instead, she moves out and become a landlord for a period of less than three years. Then, she unloads the home for $700,000 and reaps a gain of $200,000—an amount still under the exclusion threshold of $250,000 for a single person.

It makes no difference that a portion or even most, of the appreciation occurs during the rental period. Such attention to timing will keep money in her pocket and out of the IRS's till, which is, after all, what tax planning is all about.

Caution. As long as Olivia sells within three years after moving out from a dwelling that was her principal residence for the two years before the move, she remains able to avail herself of the full exclusion. Olivia just needs to make sure that any rental period stays below three years. The penalty that she incurs for being unmindful of the calendar is that her property ceases to be her residence for two out of the past five years that conclude on the sale date, as a consequence of which she flunks the owner-occupied test and forfeits the exclusion.

Once every two years limit. How often does the IRS allow Olivia to take advantage of the exclusion? As many times as she’s able to meet the two-year ownership and use rule. Generally, though, she can use it only once in any two-year period.

For those who want more information, I have written a variety of columns offering effective strategies for homeowners.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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