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Partial exclusion negates tax bill


Dear Tax Talk,
My husband and I have owned our home in Maryland for about 18 months. We are planning to sell next month and move to North Carolina. We are both transferring with our current employers. We requested these transfers rather than being asked to transfer. We have about $100,000 in equity in our home. Will we have to pay capital gains taxes? -- Jennifer

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Dear Jennifer,
Generally a married couple filing a joint return can exclude $500,000 in gain from the sale of their principal home if they lived in and owned it for two of the last five years. An unmarried individual with the same time frame can exclude $250,000 in gain.

If the home is sold prior to meeting the use and ownership time requirements, a partial exclusion may be available if the move is a result of:

1. A change in place of employment
2. Health reasons or
3. Unforeseen circumstances.

Whether you or your employer initiate the employment transfer is not relevant. You can still qualify for the reduced exclusion even though it was your decision to make the move.

The reduced exclusion is fairly generous and will be more than enough to avoid paying taxes on the $100,000 in appreciation on your home. The reduced exclusion is calculated by taking the period of actual use and dividing it by the required 24 months and multiplying the resulting percentage by either the $500,000 in the case of a married couple or $250,000 for a single person.

In your case, your 18 months of use is 75 percent of the required time so you'll qualify for a maximum exclusion of $375,000 (75 percent multiplied by $500,000). This is more than you need to avoid paying tax.

-- Posted: June 23, 2004




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