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George Saenz, the Tax Talk columnistAvoiding capital gains on a house sale

Dear Tax Talk,
My wife and I sold our home three months shy of the two-year period because of travel expenses and time to and from work. Also my transfer to another site location only took me to 48 miles from my house. When we sold, we had to pay back our second mortgage that was taken to pay off debt because we had another child on the way.

My profits were cut in half. My total profit was about $85,000, but I had to pay about $45,000 on the second mortgage. So really the money in my pocket was only about $40,000. Then when we bought our new house, we put down $52,000, which included the $40,000 that I pocketed. Is there anything I can do to eliminate or greatly reduce the $7,000 to $9,000 I am looking at having to pay in taxes this year?
-- Andrew

Dear Andrew,
Of course, your profit is not affected by the payment of the second mortgage. And, as you probably already know, a married couple can exclude up to $500,000 in gain from the sale of their principal residence. But the couple has to have lived in and owned the home for two years within the last five years to get the maximum exclusion.

A lesser amount of gain (approximately $20,000 a month for every month lived in the home) can be excluded from income when the two-year minimum is not met but the home was sold due to a change in place of employment.

A sale for a change in place of employment is considered to be the reason you sold your home if either of the following is true:

  1. The sale qualifies under a "safe harbor." A safe harbor is a set of certain facts and circumstances that qualifies you to claim a reduced maximum exclusion.
  2. The primary reason you sold the home was a change in place of employment and the facts and circumstances surrounding the sale support this conclusion.

A safe harbor is met if the new place of employment is at least 50 miles farther from your home than the former place of employment was. This 50-mile rule is grounded in the rules that relate to deductible moving expenses and probably has been around for 50 or more years. Given today's congested traffic conditions, the IRS probably should consider adding a time test to this safe harbor.

However, even though you do not meet the safe harbor distance test, you can still exclude the gain if the facts surrounding your move support the conclusion that the move was the result of a change in place of employment. For example, once you were certain that the new place of employment was suitable, you listed your home for sale due to the strain from the commute.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: March 8, 2006
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