| Home-sale tax break a boon for owners |
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Michael E. Kitces, director of financial planning
for the Pinnacle Advisory Group in Columbia, Md., gives this example:
A property is acquired by like-kind exchange in 1999, converted
to personal use as a residence in 2002 and then sold in late 2004.
Since the like-kind property was owned for five years, it meets
the new tax code ownership-length provision. And having met the
new five-year acquisition rule for a swapped property, Kitces says,
the owner qualifies for the capital-gains exclusion since he lived
in the property for two years after its conversion. If, however,
the property had been exchanged in 2001, even if the seller had
made it his principal residence shortly after the date of the swap
and thereby met the two-year use rule, he still would be not be
able to exclude any profits on the sale.
In either case, though, the pesky reporting requirement
remains history. When your gain doesn't exceed the limit, you don't
have to file anything with the IRS.
Special rules for married
couples
While a husband and wife get double the exclusion of single
home sellers, couples also have some additional considerations when
it comes to determining whether their sale is tax-free.
Either spouse can meet the ownership test. For example,
the IRS says it's OK if you owned the home for the last two years,
but you just added your new husband to the title when you got married
six months ago. Since you owned the residence for the requisite
time, as joint filers you have no problem meeting the ownership
test even though your husband wasn't an official owner for that
long.
However, both husband and wife must pass the use test;
that is, each must live in the residence for two years. But the
shared use doesn't have to be while you file jointly. If you and
your now-husband shared the home for 1½ years before tying
the knot and then six months as newlyweds, the IRS will allow you
to claim the exemption. But if he didn't move in until the wedding
day, you're out of tax-exclusion luck.
And while you're learning about your new spouse, make
sure you find out all about his or her previous home-sale history.
"The two-year eligibility rule applies to both spouses, so
full home disclosure is another financial area you need to consider
when getting married," says Trinz. "You need to find out
what you're getting."
Under this couple requirement, if either spouse sold
a home and used the exclusion within two years of the sale of any
jointly-owned property, the couple can't claim the exclusion. That
means if your new husband sold his townhouse a month before the
wedding, then you'll have to wait two years after that property's
sale date before you can dispose of your shared marital residence
tax-free.
Figuring the correct exclusion
amount
OK, you (and your better half if you're married) met the use
and ownership tests, as well as the two-year previous-sale time
limit. Now it's time to do the math to avoid writing a big check
to the U.S. Treasury.
As a seller, you naturally focus on how much you got
for your house. That is an important number, but not the only one
you'll need when it comes to figuring whether you'll owe taxes on
the sale.
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