If you sold your home in 2016, or are considering selling your home in 2017, you need to be aware of some complicated and often confusing tax laws and rules. Not only could you be taxed by a capital gain penalty, but your brain could be unduly taxed with worry and concern.
The five-year test period and capital gain rules.
Generally speaking, if you owned and lived in your home, your primary residence, for two of the last five years before the sale, and have a capital gain from the sale of this home, you may qualify to exclude up to $250,000 of that gain from your income. That amount could double if you file a joint return with your spouse.
How does the capital gain exclusion work?
To qualify for this capital gain exclusion, you must meet both the ownership test and the use test. You must have both lived and used your home for a period aggregating at least two out of the five years before the sale. Each test, ownership and use, can be during different two-year periods, but both must be within the same five year period prior to the date of the sale.
What if you don’t meet the ownership and use tests?
Some issues in life can change or alter the standard ownership and use tests and still qualify for the capital gain exclusion. They can include:
- receiving the house in a divorce settlement,
- short-term absences as “time lived in” the house,
- a surviving spouse who has not remarried including the time that the deceased spouse lived in the house
Suspension of the five-year test period.
If you or your spouse were on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community, you may choose to suspend the 5-year test period for up to 10 years. Qualified official extended duty is for more than 90 days or for an indefinite period if you’re at a duty station that’s at least 50 miles from your main home or if you are residing in government housing under government orders.
What about installment sales and capital gain?
Simply put, an installment sale is one in which you sold your home under a contract that provides you’ll receive at least one payment after the tax year in which the sale occurs unless you “elect out” on or before the due date for filing your tax return (including extensions) for the year of the sale. Even if you use the installment method to defer some of the gain, the exclusion of gain remains the same. If you think this may apply to you, or you’re not positive as to how to report this type sale on your tax return, we definitely need to talk.
What are the exceptions to this rule?
If you excluded the gain from the sale of another home during the two-year period prior to the sale of your home, you will probably not be eligible for the capital gain exclusion.
Even if you don’t pass the five-year test period rule, a reduced exclusion may be available if you have a change in employment or health or other unforeseen circumstances, including multiple births from a single pregnancy.
What’s the bottom line?
If you sold your home last year or are considering selling your home this year, let’s talk. The IRS allows this and most every issue to be approached from more than one direction and viewed through many, and various colored lenses.
A lifestyle of thoughtful, directed tax planning and management and continual tax preparation can help make your tax filing very easy.
When you sign your tax returns, you’re shaking hands with the IRS. Control the introduction, the meeting, and their view of you. We help you do that.
Contact us, we’re here for you. 479-478-6831