Kari McCoy's Real Estate Articles
EXCEPTIONS TO THE CAPITAL GAINS RULE
If you are planning to sell your principal residence, you probably know that the IRS will allow you to keep significant tax-free profit from the sale – $500,000 for a married couple and $250,000 for individuals – as long as you have lived in the house for at least 24 months during the 5 years prior to the sale. However, you may be obliged to sell before you meet the 2-year residency requirement. How will this affect your tax liability? Will you be able to claim any capital gains tax exclusions?
The law allows you to prorate a portion of the tax exclusion if you can convince the IRS that the sale of your home is due to “unforeseen circumstances.” The IRS has prepared guidelines for what they call “safe harbors”, meaning factual circumstances proving that your primary reason for selling the home is a job change, a health crisis or other unforeseen events.
The IRS outlines a number of factors that can qualify you as a taxpayer for the partial exemption. These may include you or your spouse having an injury, disease or illness that required you to sell the property in order to pay for diagnosis or treatment. If your doctor recommends a change of climate for health reasons, that is considered a qualification. If the taxpayer merely decides they would prefer to move to a warmer climate, that is NOT considered a qualification.
Divorce or legal separation, loss of employment leading to eligibility for unemployment income, change in employment status leading to the inability to maintain housing payments and expenses, multiple births from the same pregnancy and death of the homeowner, spouse or co-owner qualify as unforeseen circumstances. Military duty, including overseas posting of the military homeowner for extended periods of time, entitles the taxpaying homeowner to an exemption. Likewise, so do acts of war, natural disasters (such as a devastating hurricane, tornado, earthquake or flood) or the involuntary sale of your home to make room for government-sanctioned use of your property.
If your situation falls under one of these descriptions, and you have owned and lived in your home since you purchased it and during the time when the “qualifying events” occurred, you will be eligible for the partial exemption of capital gains tax. The law applies to all types of residences, including single-family detached homes, condominiums, and apartments.
The partial exclusion is based on the number of days you have lived in the home, times the standard exclusion ($500,000 or $250,000) divided by 730 days (2 years.) For example, if you are a married couple filing jointly who have lived in the home for 6 months or 182 days, you may keep approximately ¼ of the standard exclusion, or about $124,650. The amount of the partial exclusion for single taxpayers is calculated using the standard quotient of $250,000. Consult a tax professional for detailed advice about your particular circumstance.
Copyright© 2010 Kari McCoy
Kari McCoy is a resident of El Dorado Hills, and owns the Kari McCoy Group, residential real estate of Coldwell Banker. Call her at 933-kari, email her at sold@KariMcCoygroup.com or visit her website at www.TheRealKariMcCoy.com
Copyright© 2010 Kari McCoy