Here are tax facts to help answer
questions you may have regarding the sale of your house, or the purchase of
your next home.
1. Single
homeowners can exclude the entire gain on the sale of a home up to
$250,000. Married owners can exclude $500,000 if they file a joint return for the
year, either spouse meets the ownership
test, both meet the use test, and neither spouse is excluding a gain from the
sale of another home after May 6th, 1997.
2. All
homeowners must satisfy 3 tests. The
ownership test means the seller owned the home for at least 2 years of the 5-year period before the closing
date. The use test means the seller used
the property as a principal
residence for 2 years of the 5-year period.
And the waiting period test means the
exclusion wasn’t used during the preceding 2 year period. Sellers are not required to purchase a replacement residence, as they were under
the old law.
3. There
is no limit to the number of times the exclusion will apply. There is no cumulative feature. For example, a married seller may
exclude up to $500,000 of gain on each home sale over a lifetime, provided all other requirements are met.
4. Since
January 1, 1998, gains from all capital assets held for more than 12 months are
taxed at the rate of 20%, or 10%
for tax payers in the 15% tax bracket.
If sellers qualify for the exclusion, the first $250,000 or $500,000 of the gain on the sale is not taxable. Any gain beyond the $250,000/$500,000 is taxed at these capital gain rates and not
at the higher, ordinary income tax rates.
5.
Job transferees who must sell their house in less than the 2 year period can
claim a percentage equal to the
percentage of the 2 year requirement they would be entitled to a 25% exclusion
(6 months =
25% of 2 years) of either $250,000 or $500,000, depending on their situation.
6. There
are other situations where reduced exclusions are allowed. Owners who sell because of a change in health are treated the same
as job transferees. The exclusion is
available to those who owned their
home on August 5, 1997 (the date the law became effective), and sell before
August 5, 1999. Those sellers should see their tax consultant
for more information.
7. Owners
of a rental property - or a home formerly used as a principal residence - can
qualify for the exclusion even if
they no longer live there on the sale date.
That is, provided they meet the ownership,
use and waiting period tests. Also,
owners of a rental property can move into their property
for 2 years, convert the rental into a principal residence, and be eligible for
the exclusion.
