Since the passing of the Taxpayer Relief Act of 1997, taxpayers have been able to exclude capital gains from the sale of their primary residence from income up to $250,000 ($500,000 on a joint tax return) provided they met the ownership and use criteria.  To qualify for the exclusion of gain, the taxpayer had to have owned and used the property as their primary residence for periods aggregating to two years or more of the previous five years.  The five-year period is measured from the date of the sale.  Short temporary absences for vacations or seasonal absences are counted as periods of use.  However, if the property was acquired in a like-kind exchange, the taxpayer must wait five years from the date of acquisition, before reselling the property and using the exclusion of gain. The exclusion rule requires gain recognition to the extent of any depreciation taken after May 6, 1997, for the rental or business use of your home.

Partial exclusion

If the taxpayer does not meet the ownership and use requirements for the full exclusion, they may be eligible for a partial exclusion when the sale of the residence is due to: (1) a change in the place of employment, (2) health reasons, or (3) unforeseen circumstances.  In order for the taxpayer to qualify for the partial exclusion, the primary reason for the sale must be related to one of the aforementioned three reasons.  The IRS has established safe harbor tests for each reason. 

The taxpayer meets the primary reason test safe harbor for the change of employment test, if the taxpayer’s new place of employment is at least 50 miles away from the previous place of employment.  If there was no previous place of employment, then the distance between the taxpayer’s new place of employment and the residence sold must be at least 50 miles.

The taxpayer meets the health reasons safe harbor test, if the reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness or injury; and a doctor recommends a change of residence for reasons of health.  Selling your home because it is beneficial to a person’s general health does not qualify for the partial exclusion.  The IRS allows the relocation due to health reasons to benefit the taxpayer and his or her dependents.  The list of eligible dependents includes his or her children, parents, siblings (to include step and half), uncle, aunt, nephew or niece, and in-laws.

If the primary reason for selling your personal residence is any of the unforeseen circumstances listed below, you may exclude from your gross income a portion of the gain from the sale of your home. 

• The sale occurred due to an involuntary conversion of your home.
• Natural or man-made disaster or acts of war or terrorism resulting in the casualty to your home,
• In the case of yourself, your spouse, a co-owner of the residence, or a person whose main home is the same as yours, one of the following occurs: (1) death; (2) unemployment(if eligible for unemployment compensation); (3) a change in employment or self-employment status that results in the inability to pay basic living expenses (such expenses are discussed more fully below); (4)divorce or legal separation; or (5) multiple births resulting from the same pregnancy.
• An event the IRS determines to be an unforeseen circumstance in its published guidance. Previous events the IRS has determined to be unforeseen circumstances include the September 11, 2001 terrorist attacks.

Reasonable basic living expenses, as mentioned above, include amounts spent for food and clothing, housing and related expenses, medical expenses, transportation expenses, tax payments, court ordered payments, and expenses reasonably necessary to produce income.

(Prepared by Tom Cornwell, CPA:Thomas, Judy & Tucker, P.A. - no advice or representation made by Trusted Realty Solutions, Inc. with regard to tax planning.)