Napier & Company, LCC

Generous home-sale exclusion rules can reduce or even eliminate federal taxes on the sizable home-sale gains that are being realized in today’s overheated real estate market.

Unique tax breaks

• A taxpayer can exclude from income up to $250,000 ($500,000 married filing jointly) of gain from the sale of a personal residence.
• The individual (couple) must have owned and used the home as a principal residence for at least two out of the five years prior to the sale. However, the two years do not have to be consecutive.
• The exclusion may be claimed for a sale of land used as part of a principal residence, even if the home is sold in a separate transaction.
• All of the gain from the sale of a mixed-use home (one used for business purposes and as a principal residence) – except for gain resulting from post- May 6, ’97 depreciation deductions – is eligible for the exclusion if both the residential and business or rental usage occur within the same dwelling unit (e.g., one room in the house is used as the office of a sideline business).
• The health condition required for the partial-exclusion rule is met if a person sells his or her home and moves cross-country to care of an ailing parent. And the term “unforeseen circumstances” includes events such as divorce or legal separation, the birth of twins, and a change in employment or self-employment status that results in an inability to pay housing costs and reasonable basic living expenses.
• The five-year period in which the two-year ownership and use requirements must be met is tolled for up to ten years for armed forces members on active duty, or for U.S. Foreign Service members.
• A mixed-use property may qualify for both the home-sale exclusion and tax-deferred like-kind exchange treatment.

Contact Napier and Company for additional information about home-sale exclusion rules.