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Home sales and the tax man
Dear Dollar Diva,
Have the tax laws relating to selling a home changed for the year
2000? If so, what are the changes?
The law changed in 1997, and it was good news for
homeowners. Hardly anyone who has lived in a primary home for at
least two years has to pay capital gains tax when it is sold.
Before the 1997 law, home sellers were allowed to
postpone paying capital gains tax until some time in the future.
There was also a once-in-a-lifetime exclusion of $125,000 in capital
gains on the sale of a home, but it could not be taken until the
taxpayer reached age 55.
Under the new law, the exclusion is higher and there
is no age restriction. If the average homeowner passes two simple
tests, he will probably not have to pay any capital gains tax on
the sale of his home. If the home was rented out and depreciated
in the past, see the Diva's "We're
converting a rental to our primary residence."
Under the old law, every time a homeowner sold a primary
home, even if it was not a taxable event, he had to attach a form
to his tax return. The Internal Revenue Service wanted to keep track
of the capital gains he was postponing or excluding. Now, if the
total gain is excluded and there is no tax, the homeowner takes
the money and runs. He is not required to report the sale to the
Internal Revenue Service
The ownership and use tests
The taxpayer needs to answer "yes" to these two questions
to be eligible for the exclusion:
- Ownership test: Did you or your spouse own
the home for at least two years during the five years prior to
the sale? Note: The home does not have to be owned by both.
- Use test: Did you (if you're single) or you
and your spouse (if you're married) use the home as your principal
residence for at least two years during the five-year period prior
to the sale? Note: The two years do not have to be consecutive.
How much capital gains can I exclude?
Unless you live in a hoity-toity place like Silicon
Valley or Palm Beach, you're going to be happy with the exclusion
amounts. If you pass the two tests and you are:
- Married filing a joint return: Up to $500,000
of capital gains is excluded from the sale of your primary home.
If you bought your home for $300,000 and sold it for $500,000
two years later, the $200,000 in capital gains is not taxable.
- Married filing separately: Each of you figures
your capital gains based on your ownership interest in the home
as determined by the state where you live. Each of you can exclude
up to $250,00 of capital gains from your share of the sale.
- Not married: If you're not married, you can
exclude up to $250,000 of capital gains from the sale of your
primary home.
The exclusion is determined on an individual basis.
If a married couple sells a home and one fails the "Use Test," the
other is still entitled to exclude up to $250,000 of capital gains.
Under the old law, if one spouse wasn't eligible, neither was eligible
and the exclusion was lost.
This exclusion can be used over and over again, but
not more frequently than once every two years.
The IRS has put together a user-friendly booklet,
Publication
523, Selling Your Home, that will tell you everything you ever
wanted to know about selling your home.
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DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
