Guest Author - Kate Woods
In slumping real estate markets it may seem that there are no homes selling at gains but in reality some people are still making money on the sale of their personal residences. This prompts the question of whether that gain is taxable for income tax purposes. Let’s take a look at that query...
For sales of a personal residence after May 6, 1997, if you meet the ownership and use tests, you generally have to report a gain only if your gain is greater than certain amounts designated by tax law. What are the ownership and use tests that apply and what are the amounts that apply to making these determinations?
To meet the ownership tests, according to the IRS, you may be able to exclude gain from income if during the 5 years prior to the date of sale and ending on the date of sale the following applied:
•You owned the home for at least 2 years (the ownership test)
•You lived in the home as your main home for at least 2 years (the use test) and
•During the 2 years ending on the date of the sale, you did not exclude gain from the sale of any other home.
Now what are the maximum exclusion amounts? You may exclude up to $250,000 of the gain on the sale of your main home if you meet the 3 tests above. If you own a home jointly and are filing separate returns you can each exclude up to $250,000 of the gain on the sale of your interest in your main home if each of you meet all 3 of the test above. If you are married and file a joint return you may be able to exclude up to $500,000 of the gain on the sale of your main home but there are additional requirements that you must meet.
•You are married and file a joint return for the year
•Either you or your spouse meets the ownership test.
•Both you and your spouse meet the use test.
•During the 2 years ending on the date of the sale, neither you nor your spouse excluded gain from the sale of any other home.
Other situations that may have special treatment available are as follows:
•If you lived in the home for less than 2 years a reduced exclusion may be available in some cases.
•If you were on qualified extended duty in the U.S. Armed Services of the intelligence community there are special provisions that may apply.
It is important to note that the gross sale price is not the number that is being considered when looking at income taxation of gain on the sale of a personal residence but the gain after the gross sale price is reduced by the basis of the property. If after applying the required tests to a personal residence sale you still have a taxable gain to deal with on your personal income tax return it would be reported on Form 1040 Schedule D, for Capital Gains and Losses.
This information related to exclusion of gain only applies when you are dealing with the sale of a personal residence. Publication 523, Selling Your Home is available at www.irs.gov.
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