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Articles
Sale of a Principal Residence
OLD RULES- Prior to May 7, 1997
Under the rules in existence prior to May 7, 1997 taxpayers were able to postpone the gain from the sale of a principal residence if they purchased another principal residence within 2 years of the sale date.Ý Under these rules, some gain would have to be recognized if the sales price of the old home exceeded the purchase price of the new home.Ý There was also a once-in-a-lifetime exclusion available to taxpayers over the age of 55 who could elect to exclude up to $125,000 of gain from the sale.
NEW RULES - After May 6, 1997
The new rules for the sale of a principal residence are generally more beneficial to taxpayers.Ý Under the new law, each taxpayer is able to exclude up to $250,000 of gain from the sale of a principal residence.Ý Married taxpayers filing jointly are able to exclude up to $500,000 of gain.Ý There is no re-purchase requirement.Ý These new rules replace the previous deferral of gain and one-time exclusion provisions.
There are some conditions that must be met in order to qualify for this exclusion.
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The taxpayer must have owned and occupied the residence as a principal residence for at least two of the five years before the sale.Ý (The occupation need not be continuous as long as the aggregate equals or exceeds two years.)
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The exclusion can be used repeatedly, however it cannot be used more than once in any two-year period.
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In the case of married taxpayers, one spouse must meet the ownership test, both spouses must meet the use (occupancy) test, and neither spouse could have sold or exchanged a residence within the past two years to qualify for the $500,000 exclusion.Ý If one spouse meets all tests, but the other does not, he or she is entitled to the $250,000 exclusion.
SPECIAL CIRCUMSTANCES
Divorced taxpayers:Ý
If a residence is transferred to a taxpayer as the result of a divorce, the time the taxpayer's former spouse owned the residence is added to the taxpayer's period of ownership for purposes of the two-year test.Ý Additionally, the taxpayer that owns the residence is deemed to use it as a principal residence during the time the taxpayerís spouse or former spouse is given use of the residence under a divorce or separation agreement.
Hardship relief:Ý
A taxpayer who fails to meet the exclusion requirements due to a change in place of employment, health, or unforeseen circumstances can prorate the exclusion amount.Ý For example, a single taxpayer that owns and occupies a principal residence for 1 year may exclude $125,000 of gain (1/2 of $250,000.)Ý
Maintenance of records:Ý
For many taxpayers the $250,000 or $500,000 exclusion eliminates the need to keep records of capital improvements that increase the basis of the residence.Ý Taxpayers should continue to maintain records however in cases where:
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The gain can be expected to exceed the exclusion amount (ie:Ý the taxpayer intends to live in the residence for a long period of time or the value of the residence is appreciating rapidly.)
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There is a possibility that the owners may claim a depreciation deduction for rental or home office use of the residence.
Depreciation deductions taken:Ý
The exclusion does not apply, and gain must be recognized to the extent of any depreciation allowable with respect to the rental or business use of a residence.
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