Sale of Home

Selling Your Home: What You Need To Know Tax-Wise

New Law for 2009

For sales after 2008, a home sale gain attributable to a period of nonqualified use cannot be excluded. A period of nonqualified use is generally any time (after 2008) that the property is not used as the taxpayer's principal residence. For instance if you sell your principal residence and move into your beach house the subsequent gain on the beach house will be partially taxable for the period of nonqualified use as your second residence before your move.

If you sell your main home, you will probably be able to exclude all or part of any profit you make on the sale for federal income tax purposes. This means that, if you qualify, you will not have to pay tax on the profit, up to the limit discussed below. To qualify, you must meet the "ownership" and "use" tests described here.

Amount of Exclusion

You can exclude the entire profit on the sale of your main home up to:

I. $250,000, or

$500,000, if all of the following apply: (1) you are married and file jointly for the year, (2) either you or your spouse meets the ownership test, (3) both you and your spouse meet the use test, and (4) neither you nor your spouse excluded gain from the sale of another home in the two-year period before sale.

Ownership and Use Tests (SEE NEW LAW ABOVE IF RESIDENCE WAS NOT ALWAYS YOUR MAIN HOME)

You can claim the exclusion if, during the five-year period ending on the date of sale, you have:

Owned the home for at least two years (the ownership test), and

Lived in the home as your main home for at least two years (the "use" test).

The two years of ownership and use during the five-year period don't have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days during the five-year period. Short temporary absences, such as vacations, are counted as periods of use, even if you rent out the property during that time.

Ownership and Use Tests Met at Different Times. You can meet the ownership and use tests during different two-year periods. However, you must meet both tests during the five-year period ending on the date of the sale.

Special Situations. There are a number of special situations that may result in exceptions to the general rules. For instance, there is an exception to the 2-out-of-5-year use test if you become physically or mentally unable to care for yourself at any time during the five-year period. You qualify for this exception to the use test if, during the five-year period before the sale of your home:

You become physically or mentally unable to care for yourself, and

You owned and lived in your home as a main home for a total of at least one year.

Under this exception, you are considered to live in your home during any time that you live in a licensed facility such as a nursing home.

Caution: There are other special rules and complexities involved with the exclusion, making it all the more important to consult with your tax advisor before entering into a sale transaction.

You cannot exclude gain on the sale of your home if, during the two-year period ending on the date of the sale, you sold another home at a gain and are excluding all or part of that gain. However, you can claim a reduced exclusion if you sold the home due to a change in health or place of employment.

You cannot exclude the part of your gain that is equal to any depreciation taken for the business use of your home after May 6, 1997.

Further, you get a reduced exclusion if you use your home for business or rental purposes. The reduction applies to that part of the dwelling that fails to meet the two-year used-as-the-main-home test.

Gain that doesn't qualify for exclusion including gain in excess of the exclusion amount, is capital gain. This, with some exceptions, is true of gain allocable to business use.