Capital
Gains on the Sale of Your Principal Home
The current laws related to the sale of your
home goes as follows:
If you own and live in your home
for 2 of the 5 years prior to selling your
house you can exclude the gain up to
$250,000 ($500,000 for a couple filing
jointly). In the case of a couple filing
jointly neither spouse can have used the
exclusion in the prior 2 years and both
spouses must live in the house for 2 year.
At face value that looks pretty straight
forward. But there are always nuances that
can turn black and white to muddy gray. So
let's look at these nuances:
In the case of a couple
filing jointly:
1.
Neither
spouse can have used the exclusion in the
prior 2 years.
2. Both
spouses must live in the house for 2 years.
Example 1
Let's say you bought HOUSE A in October
1999. You lived there for 2 years; then made
it rental property. You bought HOUSE B in
2001. In 2003, you sold HOUSE B, took the
exclusion and bought HOUSE C. In May 2004,
you decide you are done being a landlord so
you sell HOUSE A. You lived in HOUSE A for 2
of the 5 years prior to selling HOUSE A, but
because you took the exclusion on HOUSE B in
2003, you are not eligible for the
exclusion.
Example 2
Jim, a single guy, buys HOUSE A in August,
2000. In May 2001, he marries Susie and she
moves into HOUSE A with Jim. In January
2003, Jim and Susie decide to buy a bigger
house, HOUSE B. Because Susie did not live
in the house for 2 years, they can only
exclude up to $250,000 on the sale of HOUSE
A.
EXCEPTIONS
There are several situations where
exceptions to the rules are granted.
1.
Medical reasons
2. Change
in place of employment
3. Unforeseen
circumstances - what defines an unforeseen
circumstances has not be decided the IRS. Be
careful when using this exception.
Under these exceptions the exclusion is
reduced based on the number of days you
lived in your home. So if you lived in your
house for 12 months you would be entitled to
half of the exclusion.
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