Before acting on this topic,
you should seek professional advice
if you meet the residency requirements, gains up to
$250,00 of a residence are tax-free; for married taxpayers
filing a joint return, the exclusion generally increases to $500,000.
The residency requirement is that you used the residence as your
principal residence for at least two of the last five years. The
exclusion applies each time a principal residence is sold, as long as
residence was owned and used as the principle residence during at least
two of the
previous five years. Under certain circumstances (e.g. military service
or a job change) the
two-year requirement is partially waived.
acquired through 'like-kind' exchange -- If the residence was acquired through a
tax free exchange of another
property, the residence has to be owned and used as a principal
residence for at least five years prior to the sale. If the property is not used as a principal residence for at least five years, then the $250/500,000 exclusioin does not apply. If the exclusion rules do apply, part of the gain may be taxable under the rules discussed in the rest of this page.
An example of a
like-kind exchange is where you exchanged rental property for other
rental property which you then used as your principal residence instead
of renting it.
Exclusion applies to portion of home used for business from May 6, 1997 through 12-31-88 - but gain is taxable to extent of depreciation -- The 250,000/500,000 exclusion rules described above do not apply to any portion of the
residence that was subject to depreciation after May 6, 1997. For example, if you
claimed (or should have) a home office deduction for one room of your residence, the gain (to
the extent of depreciation taken since May 6, 1997) will not be excluded from
your income. You cannot avoid the depreciation exception to the exclusion
rules by choosing not to depreciate the property on your tax return. The
deciding factor is whether or not you were entitled to take the
likely the tax cost of this provision is relatively small, because the
annual depreciation deduction was probably a small amount.
Use of home for business after 2008, no exclusion allowed for the business portion of the residence - that portion of gain fully taxable -- The allowable
exclusion is reduced by a numerator equal to the number of days (after 12/31/08 the
property was used for non residential purposes divided by the total
number of days the property was owned. For purposes of this fraction, the
denominator includes any applicable time period before year 2009.
There is one taxpayer friendly exception -- Generally the numerator does not include
any vacant period between the
time owner moves out of the principal residence and the date the
property is sold. However, you need to keep in mind that if you
move out of your principal residence and the sale occurs more than
years later, you lose the entire exclusion. In this case,
you did not meet the two out of five years
requirement of using the
property as their principal residence. In certain cases, a long
(e.g. military service) will not affect the exclusion. This are is very
complex; professional advise is recommended.
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