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Real Estate Articles
Simon says: "Are you an early seller, curious what tax exemptions you qualify for?"
Sell too soon, miss the exemption. Now, the IRS spells out some exceptions to the rule.
(This was not written by Simon. It was supplied by Matt Grainger with Equity Title)
Washington – It has been a long-run tax saga for American homeowners, especially those in high appreciation real estate markets. How do they handle capital gains taxes when they profitably sell homes earlier than the two-year minimum ownership-and-use requirement for exemption?
Congress passed the basic tax code changes establishing a streamlined home-sale capital gains computation system in 1997 and 1998. Now the IRS finally has issued regulations that tell early sellers how much of their sale profits they can shelter from the federal capital gains bite-if they get to shelter anything at all.
The new regulations deal with exceptions to the $500,000 and $250,000 tax-free exclusions provisions of the '97 and '98 statutes. Those laws allow married, jointly filing home sellers to pocket up to $500,000 in sale profits ($250,000 for single or widowed filers) tax-free, provided that they owned and used the house as their principal residence for a total of two out of the five years preceding the sale. The laws also provide exceptions for certain homeowners who, for reasons of health, employment change or "unforeseen circumstances," sell their home before they are able to meet the two-year minimum holding standard.
For those who qualify, a "reduced maximum" capital gains tax exclusion is available, based on the amount of time they owned and used the house. For example, a couple who purchased a house and had to sell it just 18 months later because of an unexpected cross-country employment transfer might be able to take up to three-fourths of the maximum $500,000 tax-free exclusion. A single owner who had to sell after a year of ownership because of an incapacitating illness might qualify for half of the standard $250,000 maximum.
But what about what Congress called "unforeseen circumstances"? When can they be used by home sellers to justify a sale before the two-year deadline, potentially saving thousands of dollars in capital gains taxes? The IRS' new rules provide some no-nonsense answers. To begin, homeowners cannot claim that they experienced an "unforeseen" overwhelming desire to own a different house in a different neighborhood and expect to get an exception to the two-year rule on ownership and use.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary, therefore, please consult a professional for specific advice.
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