Selling your residence
(Revised November 2012)

If you operate a home daycare business and you decide to sell your residence, it is possible that part of the selling price could be subject to income taxes, even if the selling price is less than the cost of your residence. However, in this situation, the amount of gain you will probably have to report will probably be very small compared to the deductions you have taken on your tax return.

If you will have a large gain on the sale of your residence and the sale occurs after 2008, part or all of the gain will be taxable.

Generally, you can exclude up to $250,000 of gain on the sale of your principal residence. In many cases, if you file a joint income tax return, the exclusion goes up to $500,000.

For years through 2008, this exclusion generally applied as long as the residence was used as the principal residence for at least two out of the five years before the sale. If the property was used for a business (e.g. a daycare), part of the gain was taxable and, thus, is subject to tax. The $250,000/500,000 exclusion does not apply to any business use of a residence. However, prior to years 2009, generally the only gain needed to be reported as income was any depreciation on the residence related to the daycare use, from May 6, 1997 up to the date of sale.  

For sales occuring after 2008, more of the gain is taxable regardless of the $250,000/500,0 00 exclusion. Essentially, the taxable portion is based upon a ration of the post-2008 business use compared to the total years the property was owned.  

We discuss this topic in greater detail in our FAQ section.

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