Ask the tax adviser
By George Saenz • Bankrate.com

Home sale proceeds

Dear Tax Talk:
I sold my home just three months shy of the two-year time frame the IRS requires you to live in it. Can I defer my gains for the next year? I have already put a down payment for a new home, which I will be closing in March. Thanks for any help on this.
Carl

Dear Carl:
In 1997, the rules on the sale of a home were liberalized. The new rules make most sales of primary homes tax-free. The new liberalized IRS has even made it simpler by not requiring you to report the sale of the home unless it is taxable. You no longer have to buy a new home to avoid paying tax on the sale of the old home.

You must qualify under the new rules by meeting an ownership and a use test. When you meet the two tests you can exclude up to $250,000 in gain on the sale of the former home, (up to $500,000 in gain is excluded for married couples filing a joint return). Your gain will usually be the difference between what you paid for the house and its selling price.

The ownership and use tests look at the five years prior to the date of the sale of the former home. During these five years you must have

1. Owned the home for at least two years, AND
2. Lived in the home as your main home for at least two years.

Since you sold the home three months shy of the two-year period, you do not qualify for the exclusion. However, you can qualify for a reduced exclusion (which is very generous) if either:

1. You owned the home on August 5, 1997, and sold it before August 5, 1999, or
2. You sold the home due to a change in health or place of employment

If you believe these exceptions apply see page 13 of IRS Publication 523: Selling Your Home for computing the reduced exclusion.

Claiming exemptions

Dear Tax Talk:
I'm 17 and live with my mother, but I have a 4-month-old baby. Who claims us? My mother or me? Thanks.
Brenda

Dear Brenda:
In answering your question, I am assuming you are not married. The dependent exemption belongs to the person who provides more than half of the support. Support includes amounts spent for food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. If your mom is providing more than half of these amounts for you and the baby, she is entitled to the exemptions. When you turn 19, or 24 if a full-time student, and your income exceeds a certain amount, you may be entitled to claim the exemption for you and the baby on your tax return. So, stay in touch.

-- Posted Feb. 15, 2000

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