Rules to help save on taxes
when selling your home

Planning to buy or sell a home this summer, perhaps while the kids are out of school? You may be aware of the tax rules that permit most homeowners to exclude up to $250,000 of the gain realized on the sale of a principal residence ($500,000 for a couple). But there are some special rules that may affect your decision-making. The following will help you better understand and plan for this potential tax benefit.

The basic rule provides an exclusion from gross income for the gain on sale of a principal residence, if the taxpayer has owned and occupied it for at least two of the five years prior to sale. If you miss the two-year ownership and occupation requirement, you might qualify for a reduced exclusion depending on the reason for your move. The limit on the exclusion is $250,000 ($500,000 for a husband and wife who make a joint return for the taxable year of the sale). You may use the exclusion just once every two years.

An undivided fractional interest in a residence qualifies for the exclusion, just the same as a 100 percent interest. If two single people each own a 50 percent undivided interest in the home, and meet the two-year ownership and occupancy requirements, they each get to exclude up to $250,000 of gain.

The sale might not be completely tax-free. If you used the home for business or rental, you pay tax on the gain up to the amount of depreciation you have taken since May 6, 1997. But you don’t have to allocate the gain between the business portion and the nonbusiness portion of the home.

Did you know that vacant land could qualify for this exclusion? If it’s adjacent to the residence and is owned and used as part of the principal residence, it does. You can even sell the vacant land at a different time, to a different buyer than your residence. As long as you sell your residence within two years before or two years after the sale of the vacant land, you may be able to exclude the gain on the sale of the land as well.

If you have acquired your home through a like-kind exchange of business or rental property, and then later moved in, then you have to wait at least five years after the exchange to qualify for the exclusion.

There’s also an election available for members of the U.S. uniformed services on extended active duty. While you’re away, the five-year period is suspended, for up to five more years. That way, your use and ownership before the extended active duty still counts, even if it’s more than five years before the sale.

Knowing a little more about the ins and outs of the home-sale gain exclusion can help you make better decisions this year. It’s also a good idea to consult with a professional tax adviser regarding your specific situation before signing a purchase or sale agreement.

Mary Decker is a CPA, Certified Financial Planner and a principal of Hascal Sjoholm & Co., a full-service CPA firm in Everett. She specializes in tax and estate planning. She can be reached online at www.hascal.com or at 425-252-3173.

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