Wednesday, October 10, 2007


I thought I would repeat this ASK THE TAX PRO item from a year or so ago. It still amazes me how many taxpayers think that the old rules still apply!

Q. If I sell my home do I have to buy a more expensive one in order to avoid paying income tax on the gain?

A. It appears that there is still some confusion about the rules for taxing gain on the sale of a personal residence. Many people still think the “old rules” still apply.


In order to postpone paying income tax in the current year on the gain from the sale of your personal residence you had to “buy up” – purchase, or build, a new home that cost more than the sale price of your old home – within 2 years of the date you closed on the sale of your old home. The tax was deferred for as long as you continued to “buy up”, or until you sold your last home.

Homeowners age 55 and older could make a once-in-a-lifetime election to exclude up to $125,000.00 in gain.

These rules no longer exist!


Thanks to the Tax Reform Act of 1997, if you sell your personal residence after May 6, 1997, you can totally exclude from income up to $250,000.00 of gain if single, or $500,000.00 if married, regardless of your age at the time of the sale, if during the 5 years prior to the sale you owned and lived in the home for a total of 24 months (they do not have to be consecutive). The exclusion is not a one-time election – it is available once every 2 years.

In most cases, if the gross proceeds from the sale of the residence is less than the $250,000.00 or $500,000.00 threshold you will not receive a Form 1099-S and you do not even have to report the sale on your Form 1040.

If you are married and sell your home, which you and your spouse owned and lived in for 3 years, and realize a gain of $475,000.00 you do not have to pay any income tax on this gain. If the net gain is $525,000.00 you will only pay tax on $25,000.00 at the appropriate capital gains rate.

If you do not own and live in the home for a full 24 months you may still be able to exclude some, or all, of the gain if you had to sell the residence because of certain IRS-approved “special circumstances”. I have been surprised by some of the situations that the IRS has accepted as a “special circumstance”.
As I have discussed in previous posts, if you used part of the residence as a deductible "home office" you will have to "recapture" some or all of the depreciation you claimed over the years. See my August 8, 2007 and August 20, 2007 posts.

You should still keep the original Closing or Settlement Statement for the purchase of your home for as long as you own it, and maintain documentation on all capital improvements made to the home over the years.

PS - A word to the wise (or actually the not so wise) - A recent Tax Mama “tax quip” gave an excellent example of how not to “ASK THE TAX PRO”.


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