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Tax Relief On Selling Your Home after TRA 97

by Al Giovetti

The Taxpayer Relief Act of 1997 (the Act) makes selling your home a whole lot easier. Under the provisions of the Act, a taxpayer can exclude from income up to $250,000 in gain ($500,000 if married filing jointly) on the sale of his or her primary residence. Previous tax rules for rolling over the house gain and for the once-in-a-lifetime exclusion of $125,000 in gain have been repealed.

To qualify for the new exclusion, you must have used the home as your principal residence for at least 2 of the 5 years before the sale. You can use the exclusion once every two years. The new rules generally are effective May 7, 1997, so if you sell your home after that date you must wait two years to sell the new one in order to use the exclusion again.

If you are married, you may exclude up to $500,000 in gain if: either spouse owned the home for at least 2 of the 5 years before the sale; both spouses used the home for at least 2 of the 5 years before the sale; and, neither spouse is ineligible for the exclusion because of the two-year limit. If one spouse is ineligible for the exclusion, then the eligible spouse can exclude $250,000 in gain.

Example: Mary sells her home, which she has owned for ten years, in November 1997 and excludes $75,000 in gain. She marries John in December 1997. John has owned his home for five years. If John sells his home next year, he only can exclude up to $250,000 in gain, since Mary has used the exclusion within the last two years.

Example: Tom and Ellen have been married for two years. Tom moved out of his apartment and into Ellen's house when they were married. They sell Ellen's house for a $450,000 gain. Since they are allowed to exclude up to $500,000 in gain on the sale, Tom and Ellen pay no tax. Even if you or a spouse have used the old $125,000 once-in-a-lifetime exclusion, you still can use the new exclusion on home sales that otherwise qualify.

Example: Bill and Dorothy sold their home five-years ago and excluded $125,000 in gain under the age 55 exclusion. They purchased a home in Florida. They decide to sell the home and move to Georgia. They can exclude up to $500,000 in gain on the sale.

If you sell a home due to a change in jobs, health problems, or "unforeseen circumstances", but you haven't satisfied either the 2-out-of-5-year use test or the once-every-2 year rule, then you can exclude a pro rata amount of the gain.

Finally, you can't use the exclusion for any part of your home you've rented out or claimed as a home office after May 6, 1997.

One of the benefits of the new law is that you may no longer need to keep years of records regarding purchases, sales, and capital improvements on your home(s).

However, you should keep records if: the house is rapidly appreciating in value; you claim a home office deduction; you rent all or part of the property; or, you don't plan to own the home for two years.

Even though the new law eases up the paperwork for some people, always consult your accountant or tax advisor before selling your home.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice. For information on how these general principles apply to your situation, please consult an accounting or tax professional.

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