Selling homes can incur tax consequences. But there are circumstances in which a homeowner can get tax relief from a sale.
There is an exclusion break for sellers. They can "exclude," meaning escape taxes on as much as $500,000 in profit for married couples filing jointly and $250,000 for those who file single returns or are married and file separate returns. Remember, that's profit, not sales price.
What if the profit is greater than the exclusion amount of $250,000 or $500,000? The excess is taxed as a long-term capital gain. For most sellers, the maximum rate is 15 percent. But the rate can go as high as 20 percent (23.8 percent for those who are liable for the Medicare surtax), plus applicable state taxes.
The exclusion isn’t a one-time opportunity. A seller can claim it as often as every two years. To qualify, she must pass two tests. First, she has owned and lived in the property as her principal residence or main home for at least two years out of the five-year period that ends on the date of sale. Second, she hasn’t excluded gain on another sale of a principal residence within the two years that precede the sale date.
Those two years needn’t be consecutive; they can be off and on for a total of two full years. Short temporary absences for vacations or other seasonal absences count as periods of owner use. This holds true even if she rents out the property during the absences.
The IRS figures the ownership and use tests separately. Under this pro-taxpayer approach, the exclusion is available when, for example, an apartment dweller buys her apartment after the building goes condominium and moves elsewhere before she sells the apartment. The law doesn’t require her to own and use the dwelling simultaneously for at least two years. For exclusion purposes, the period of apartment use and condominium ownership needn’t involve the identical period of years.
There’s tax relief in the form of a partial exclusion for someone who sold another home within the previous two years or fails to satisfy the ownership and use requirements. The partial exclusion becomes available when the primary reason for the sale is health problems, a change in employment, or certain unforeseen circumstances. They include divorce or legal separation, or natural or man-made disasters that cause residential damage—for instance, back-to-back hurricanes Harvey and Irma.
To illustrate, she’s single, have lived in her dwelling for just 12 months and moves to a new job in another city. She can exclude gain of as much as $125,000—12 months divided by 24 months, or 50 percent times $250,000.
This means the place she lives most of the year, as opposed to a vacation dwelling or property for which she charges rent.
The exclusion isn’t limited to the sale of a conventional single-family home. Her principal residence also can be a condo, a cooperative apartment, her portion of a multi-unit apartment building, a house trailer, a mobile home or anything else that provides all the amenities of a home, such as a houseboat or yacht that has facilities for cooking, sleeping and sanitation, or even a vacation retreat that you move into after retirement.
The location of the principal residence doesn’t matter. It can be in a country other than the United States.
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About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.