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Call it a holiday gift for America's home sellers. The IRS has
just answered many of the long-pending questions about tax exempt
capital gains on home sale profits.
TOP OF THE LIST: What happens if you have to sell a house before
the minimum two-year threshold for taking the maximum $250,000
or $500,000 tax free exclusions? The standard rule allows married,
joint filing home sellers who own and use property as a principal
residence for an aggregated two years out of the five preceding
the sale to exclude up to $500,000 in profits, tax-free. Single
filing sellers can shelter up to $250,000 of gain
But what about people who have to sell before the two year minimum?
For them, Congress created a partial exclusion safety net but
limited it to situations in which the early sale was caused by
a change in employment, health or "unforeseen circumstances." The
partial exclusion is important because it's often worth as much
as the full exclusion. For example, a single home seller whose
employment change forces an early sale after just one year of ownership
could qualify for 50% or $125,000 of the maximum $250,000 single
seller exclusion. The odds are that's more than enough to make
the sale totally tax free.
For an employment-related partial exclusion to be allowed, the
seller's new place of work must be at least 50 miles farther from
the old (sold) home than the former workplace was from that dwelling.
To qualify for health reasons, early sellers need to show the
sale was related to disease, illness/injury of an owner/co-owner
of the property, or a physicians recommendations to change the
residence for health reasons. Sales related to an owner's need
to provide health care for sick family members will also generally
qualify, however sales intended to be "merely beneficial to the
general health" of the seller will not.
As to "unforeseen circumstances," the rules identify seven major
categories, however may open the door to others that the taxpayer
can demonstrate to fit the letter and spirit of the law. The categories
are as follows:
- Death of a homeowner spouse, co-owner or family member.
- Divorce or legal separation of an owner or co-owner.
- A job loss that makes an owner or co-owner eligible for unemployment
compensation
- A change in employment that leaves an owner or co-owner unable
to pay the mortgage or basic living expenses
- Multiple births resulting form the same pregnancy (Yes, quadruplets
can save you taxes.)
- Damage to residence caused by natural or man made disasters,
acts of terrorism, or war.
- Condemnation of the property by a public entity
- Due to the absence of such rules, in recent years the IRS urged
early sellers not to use the "unforeseen circumstances" rational
Now the agency recommends that anyone who could have qualified
for tax relief in a prior year under the newly issued guidelines
should seek a refund. File a form 1040X amendment to whichever
year's tax return on which you initially reported the hoe sale
gain. The new rules clarify other issues, such as what is "principal
residence". That is an important definition when many Americans
own more than one house but only the principal residence gets the
big dollar capital gains tax breaks. For any given tax year, according
to the IRS, your principal residence is the one you use as your
home a "majority" of the days during the year.
The rules also list a variety of common-sense indices that help
establish your main home address from voter registration to federal
and state tax returns etc.
The IRS's latest guidelines provides surviving spouses the full
$500,000 exclusions "only for the year of the decedent spouse's
death."
For years, armed forces and corporate employees transferred over-seas
have complained that their two and three year absences from their
homes interfere unfairly with their ability to use the $250,000
- $500,000 tax breaks because they are not using their residences.
The IRS declined to change existing rules, suggesting instead
that qualified "short term absences" must be established on individual
"facts and circumstances."
The new rules allow home owners "Physically or mentally incapable
of self care" to qualify for the maximum exclusions provided they
have lived in their homes for at least 12 months prior to entering
a licensed nursing or medical care facility.
By Kennth R. Harney - Washington
Courtesy of the Los Angeles Times
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