$250,000 Home Sale Exclusion Our tax law has changed the definition of luck. Win a $100,000 dream house and you're lucky all right - if you can pay the tax. Maybe you can auction off the garage and patio to come up with the $28,000 cash. Until 1997, you weren't much better off as an existing owner, either. If you bought your house before 1980, your house value has probably increased enough to make an Arab oil minister weep. And the difference between the price you paid for your home and the wealth of nations it now brings could be taxable capital gain. That's not a home, it's a tax time bomb. Don't panic. Congress has enacted three measures to relieve most of the hardships rising home prices have created for homeowners. Which strategy you use depends on the date your home was sold in 1997. Thanks to the 1997 tax bill, the likelihood you will ever owe taxes when you sell your home has decreased dramatically. The only losers will be those who own high-priced homes or those who have been constantly on the move, trading up to more expensive homes. Under the 1997 tax bill, a $250,000 exclusion replaces the more limited $125,000 exclusion given to those over age 55 under prior law. It also replaces the law that allowed a homeowner to delay paying taxes on profits from home sales if you bought a more expensive home within two years of sale. However, these old law provisions still apply to home sales before May 7. 1997. And if you sold your home between May 7, 1997, and July 28, 1997 (entering into a binding sales contract by that date counts as if you sold it on that date), then you can choose whether to report your gain using the old or the new law. If you have a large gain, you may prefer to roll it over into another house and defer the tax under the old law. $250,000 exclusion of gain - Home sales after May 6, 1997 For home sales after May 6, 1997, you may exclude up to $250,000 in gain from the sale of your home. Married couples filing joint can exclude up to $500,000 ($250,000 each if they file separate returns). It's easy to qualify. You merely have to own and occupy your house as your principal residence for at least two of the five years before the sale. You can take this exclusion time and again, as long as you live in each home for at least two years. Residence in a qualified, licensed facility (such as a nursing home) will count as time lived in your own home if you become physically or mentally incapable of caring for yourself during the five-year period before sale. In applying the once-every-two-year rule, sales before May 7. 1997. do not count. Married couples may take the $500,000 exclusion if (1 ) they file a joint return, (2) either spouse meets the ownership requirement, (3) both spouses meet the use requirement, and (4) neither spouse has sold a home within the last two years. If you are filing joint, but were not sharing the residence you sold with your spouse, you may claim an exclusion of up to $250,000. Your spouse can also claim a $250,000 exclusion on the sale of the other home he or she has been living in. If you marry someone who has used the exclusion within the last two years, you are limited to a maximum exclusion of $250,000. Once both of you meet the ownership and use rules and two years have passed since either of you claimed the exclusion, you may exclude $500,000 of gain on your joint return. If you have postponed gain by rolling over prior home-sale proceeds into more expensive homes, the time you have owned and used your present home includes the period you owned and used the other residences. If you are forced to sell your home before you meet the requirements for the exclusion because of poor health, change of employment, or some other unforeseen circumstance, you may claim a reduced exclusion. The amount you may exclude is computed using a formula based on how long you have owned and occupied your home, compared with the two-year eligibility requirement. For example, if you are single and lived in your home for 18 months before your employer transferred you to another city, you could exclude gain of up to $187,500 ($250,000 x 18/24). The reduced exclusion for married couples will be a percentage of the maximum $500,000 exclusion, if both spouses meet the use requirement. Exception: If you owned your home on August 5, 1997, you will qualify for a reduced exclusion if you sell before August 5, 1999, even if the sale did not result from an unforeseen circumstance. If your home was transferred to you in a divorce, the amount of time your spouse or ex-spouse owned the house is attributed to you in meeting the ownership test. However, you must meet the use test on your own. But note: You are treated as using the house during any period of time in which your spouse or former spouse is living in the home. What if your spouse dies? In that case, you get credit for the time your deceased spouse owned and used the property. If you sell your home in the year your spouse dies and file a joint return with your deceased spouse, you will be entitled to the $500,000 exclusion if the requirements for this joint exclusion were met (see above). Because the exclusion is an election, you do not have to take it. For example, it might be to your benefit not to claim the exclusion where you have owned and used two houses as your principal residence during the past five years, and you plan to sell both within two years of each other. You will save more tax by electing out of the exclusion when you sell the house with the smaller gain, and saving it for the larger gain. If your home is used partly for business or as an office, you must pay tax on any gain to the extent of allowable depreciation after May 6, 1997 (see Sale of home used for business or rental). The exclusion applies to exchanges as well as sales of personal residences. For purposes of the exclusion, the destruction or involuntary conversion of your home is treated as a sale. © 2004 CENTURY 21 Golden Post Realty © 1999 CENTURY 21 Real Estate Corporation. © and SM - trademark and servicemark of CENTURY 21 Real Estate Corporation. Equal Housing Opportunity.