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  Dear
Tax Talk,
We sold our home and moved into a newly built one in November
2004. We fixed the basement, thinking that we would live in
this house for at least 20 more years, but we are discovering
some problems. Most can be overlooked, but some furnace issues
are more critical. One of the furnaces is placed in the attic
and when it kicks in at night, it's so noisy that sometime
we can't hear our two toddlers crying in the other rooms.
Also, since it's placed in the attic, we cannot attach a humidifier
to it, making it difficult to breathe the dry air in Chicago's
cold nights. This is especially true for the kids, who wind
up getting sick with ear infections.
We purchased the house for $400,000, but we spent $50,000
fixing the basement. Most of the repair money was paid as
cash to contractors to keep the cost down. Now we think the
house can be sold for $500,000, less a $20,000 commission.
Is there a way to get out of paying capital gains taxes on
the projected $30,000? All the money we will get for the house
will be rolled into our next house, I hope one that we
get to design ourselves to avoid problems like the ones we
have now. Thanks in advance for your reply.
-- Will
 Dear
Will,
It's a shame that the house of your dreams is turning into
a disappointment. You probably already know that the general
rule is that you have to live in a home for two years in order
to claim an exclusion
of the gain of the sale. The exclusion is $500,000 for
a married couple that files a joint return or $250,000 for
nonmarried taxpayers. A lesser exclusion applies if the sale
is motivated by job relocation, health reasons or other unforeseen
circumstances. The last category deals with divorce or financial
difficulties.
However, your best chance for exclusion probably rests on
the health exclusion. The IRS says:
The sale of your main home is because of health if your
primary reason for the sale is to obtain, provide or facilitate
the diagnosis, cure, mitigation or treatment of disease,
illness or injury of a qualified individual (such as your
child). Health is considered to be the reason you sold your
home if, for one or more of the reasons listed at the beginning
of this discussion, a doctor recommends a change of residence.
Therefore, if you can get your child's doctor to recommend
that you move to prevent their ear infections, you should
be able to qualify for the lesser exclusion. The lesser exclusion
is a percentage of the $500,000 (or $250,000) exclusion and
is usually sufficient to avoid tax on most home sales. The
percentage is the number of months you owned and used the
property as your main home divided by 24 months.
For example, if at the time you move, you owned and used
the property as your main home for 12 months, you can exclude
up to $250,000 in gain (half of the $500,000 exclusion). You
may have to make an additional adjustment if you sold an earlier
home at a gain within two years of the health-related sale.
See worksheet No. 3 on page 15 of Publication
523.
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