|
|
 |
Home Sale Savvy
How much do you know about taxes that apply to home sales?
Phil Dyer, CFP, explains three criteria that can save taxpayers big bucks — if you meet them.
Many people remember the pre-1997 rules that required taxpayers
to purchase a more expensive home within two years of the sale of a
primary residence to defer capital gains. After age 55, taxpayers
could downsize and receive a one-time capital gain exclusion of up
to $125,000.
The Taxpayer Relief Act of 1997 significantly changed primary
residence tax treatment, making it potentially much more beneficial
for taxpayers. The new rules allow for an exclusion from income
taxes on up to $500,000 in gain on the sale of a personal residence
if married, filing jointly and up to $250,000 for single filers
under Internal Revenue Code
Section 121. To qualify for this exclusion, taxpayers must meet
these requirements:
■ Ownership. You (or your spouse, if married) must have
owned the house for at least two of the previous five years.
■ Use. The home must have been used as the primary
residence for two out of the previous five years. If you are
married, both of you must meet this requirement. If one spouse does
not, the exclusion is only $250,000. Servicemembers who meet the
ownership test above may suspend the use requirement for up to 10
years if they are on qualified, official, extended duty for 90 days
or more and are serving more than 50 miles from the primary
residence or are living in government housing. IRS Publication 3,
The Armed Forces’ Tax Guide (pages 11-12), explains this
provision in detail.
■ Frequency. You may only use this exclusion every
two years. If one spouse has sold a primary residence within the
past two years, the exclusion is limited to $250,000.
These rules turn the primary residence back into a powerful
investment tool, particularly in areas with significant price
appreciation. For taxpayers who don’t meet all requirements but sell
the primary residence because of job relocation, health issues, or
unforeseen circumstances, a reduced exclusion might be available.
Suppose the Smiths meet all requirements. They bought their home in
1985 for $200,000 and have made $50,000 in improvements, so their
cost basis is now $250,000. They sell the home for $800,000, paying
a 6 percent real estate commission ($48,000) and incurring $15,000
in fix-up and miscellaneous expenses, so their final effective sales
price (sales price less selling costs) is $737,000. Their gain on
the sale, then, is $737,000 minus $250,000 (basis), or $487,000.
Because they are married, filing jointly, and meet all requirements,
they can exclude the entire gain from income taxes.
A home must be a primary residence to qualify for this valuable
exclusion. Vacation homes and rental properties do not qualify under
this provision.
Don’t Forget to Do Your Homework
■ IRS Publication 523 is the primary source for determining
tax treatment for home sales. You can download the publication at
www.irs.gov.
— Former Army Capt. Phil Dyer, CFP, is
deputy director for financial education, Benefits Information. For
financial advice, members can contact Garrett Planning Network at
(866) MOAA-GPN (662-2476) or
www.garrettplanning.com,
or visit
www.moaa.org/financialcenter for other resources.
|
