39221 Paseo Padre Pkwy. Suite K
Fremont, CA 94538
(510) 794-1040

Dedicated to Serving the San Francisco Bay Area Since 1978

HOUSE SALE-FAQs

1. Can my boyfriend and I exclude the $500,000 gain amount? Yes, but both of you must own and use the house two of the five prior years. Then each of you will qualify for a $250,000 exclusion on your single tax return.

2. Is it different if my boyfriend and I marry before the sale and file a joint return? Yes, on a joint return both must occupy the house for the two-year period but only one need own it.

3. Do I still need to keep track of deferred gains from house sales prior to the new law? Yes, they adjust the basis of your current house. For sales after May 6, 1997, gains can no longer be deferred so record keeping will be reduced.

4. Since $500,000 of gains is excludable under the new law, do I still need to keep track of improvements to my house? If you are certain that you will NEVER sell your house for more than $500,000, the IRS won't need any records from you to show that the $500,000 gain exclusion amount is correct. BUT if your house sells for more than $500,000, you must have records that are sufficient to verify the basis in the house -- and thus show that you didn't have a gain in excess of $500,000. You will need to keep records to show the purchase price, non recurring closing costs at purchase and improvements to the house while you owned it.

5. Can I defer gain in excess of the $500,000 exclusion amount? No. Rollovers are no longer allowed. Gain in excess of $500,000 is taxed.

6. What will I do if I have a gain larger than the $500,000 exclusion amount? Pay tax on the excess or convert the property to a rental and eventually exchange it using Sec. 1031. This may be easier said than done because the rules for exchanging are very precise.

7. How long do I have to rent a property to convert it to business use? The IRS has no written answer to this question. "Intention, fads and circumstances" are the IRS buzz words that make conversion a subjective rather than an objective test. Perhaps more than three of five years of business use will make property business, since two of five years of personal use makes property qualify for the personal residence gain exclusion.

8. How long can I rent my house and still live it qualify as a personal residence for the $500,000 gain exclusion rule? Since you must live in the house two of the prior five years, the house can be rented for up to three years. Remember, however, that this two of five year rule is written in concrete with no extensions for hardship. Therefore, put the house up for sale in plenty of time to actually get it sold within the required two year window.

9. Can I exclude gains on my second home? No, the exclusion is only for a "principal personal residence." If you convert the second home to your primary residence and occupy it as such for at least two years, it can qualify for the gain exclusion.

10. Do I really have to occupy the house for it to qualify for the gain exclusion? Yes, you must live in the house as your primary personal residence for more than two years.

11. A year ago, I sold my Colorado home and deferred its gain into my new California home. I hate it here and want to move back. Since I haven't owned the California home for the required two years, do I have to pay tax on the gain? Not necessarily. If you deferred gain into a home that you owned on May 6, 1997, that hone is considered to be owned (for purposes of the two year use test) for the combined use period of both houses- thus more than two years.

12. My husband and I are both 50 years old, can we use the $500,000 exclusion amount or do we need to wait until we're 55 to sell? The age 55 requirement has been repealed. Your age has nothing to do with the new exclusion rules. You may exclude gains once every two years as long as you meet the use and ownership test.

13. My fiancee and I each have a home (both with significant capital gains) that we would like to sell to buy our dream home together. How cam we minimize the tax on the sale of our old homes? If you can wait to sell the houses, you can time the sales to exclude $500,000 on each house. For example, you and your new husband live in yow. house for two years and then sell it reporting the gain on your joint return. $500,000 of gain is excludable on the sale of your house. Then you and your husband move to his house aid live in it for two years before sale. When his house sells, it will also qualify for the $500,00 gain exclusion on your joint tax return.

14. Would it be better to sell the homes before we marry? If you plan on selling both houses now, whether you are married or not, the gain exclusion will be $500,000-$500,000 on a joint return or $250,000 each on your two single returns. However, if you can own and use each house for the required two years, as above, being married before the sale will make a big difference.

15. I build spec houses. If I live in the home I just for two years may I exclude the gain when I sell it? Probably. The new law requires that you own and use the property as your primary residence for at least two years. If you do that, the gain exclusion is available.

16. I have had an office in my home for the last ~ Is it still true that if I convert the office back to personal use the year before I sell my home, I can exclude the entire gain on the sale. The house must be a personal residence at least two of the prior five years to qualify for the exclusion. Therefore, it is important not to use a portion of the house as an office for the two years prior to the sale if you want to be assured of the maximum allowable exclusion. The new law provides that the exclusion does not apply and gain is recognized to the extent of depreciation taken on the personal residence after May 6, 1997.

17. How does the new law apply if one spouse buys out the other as part of their divorce? If one spouse buys out the other as part of divorce, the transaction is not considered a sale for the $250,000 exclusion rules. No matter the amount the buyer paid the seller-spouse, the buyer-spouse's basis in the house is the same as their basis was in the house. Thus, the buyer-spouse will get caught with tax on gains over $250,000.

18. I used to be able to rollover gain on the sales of my homes more frequently than once every two years if the home sales related to job moves. Are there any exceptions to the new two-year rule for moves mandated by my job? If the reason the homeowner cannot comply with the two-year rule is because of change of employment, health or other (yet to be determined) IRS approved unforseen circumstances, the taxpayer can exclude a fraction of the gain, the numerator being the shorter of the use period or the period between the two sale dates, and the denominator being two years.

19. Is there any way to increase the $500,000 exclusion by multiple marriages? Yes, but you have to be desperate enough to remarry. You and your spouse divorce but continue to own the personal residence jointly. You remarry and sell the house after your new spouse has lived in the house for at least two years. At the sale of the house, your ex-spouse may exclude up to $250,000 of his gain since he is considered to have used the house during the period a former spouse uses the house (thus, two out of five years) and he has owned the house for two of the prior five years. You and your new spouse can exclude up to $500,000 of gain on your married )joint return since you have owned the house for more than two years and both of you have lived in the house for more than two years.

20. June 1,1996, we bought a new home and converted our old home (in which we had lived two years) to a rental. May we exclude $500,000 of gain on the sale of that old home? Yes, as long as your old home was owned and used as a personal residence two of the last five years, you may sell it and exclude up to $500,000 of gain on your married joint return. If you moved out of the house June 1, 1996, you must sell it before June 1, 1999 to meet the two out of five year use test.

21. I lost my home in the El Nino floods of 1997. The insurance proceeds are much gn~ter than my tax basis. How does the new law affect me? If you have a gain on the involuntary conversion of your personal residence, you may use the new law to exclude $250,000/$500,000 MFJ of gains. If your gain exceeds these amounts, there are special provisions in the law (Sec. 1033) which allow you to defer gains from an involuntary conversion with the purchase of "similar in use property."

Home | About Me |Tax Help |

Copyright © 2010 David M. Britton. All rights reserved.