Selling Your Home? Tax May Be Due!


taxesThe last thing you might be thinking about when you’re selling your home is tax. Especially in this market. After all, you may ask, don’t we all get a capital gains exclusion when you sell your house? And you’re just grateful to be making some money on the sale of your principal residence.

Unfortunately, that’s one of the new tax law changes that we got in 2009. In the past, if you lived in your home for 2 of the previous 5 years, you were able to take a capital gains tax exclusion of up to $500,000 for married filing jointly or $250,000 if you’re single.

That all changed in 2009. If you’ve always lived in your home, you’re still going to get the deduction. But if there was any time when you didn’t live in your home, say it was a vacation home or a rental, then you might have to pro-rate the gain.

The rule isn’t easy to follow either. If you’d moved into the house prior to 1/1/09, you get the old law grandfathered in. If you moved in after 1/1/09, you have to prorate.

The first definition to learn under the new law is ‘qualifying use’ versus ‘non-qualifying’ use.

Qualifying Use vs. Non-Qualifying Use

Qualifying use means you or your spouse is using the home as a primary residence.

Non-qualifying use means neither you or your spouse is using the house as a primary residence.

If you’ve always had use as your primary residence, you don’t need to allocate the gain.

If you have non-qualifying use, you probably will need to allocate the gain. The portion of capital gains that can not be excluded is determined based on the following ratio:

Period of non-qualifying use
————————————–
Period of ownership

Two Exceptions to Non-qualifying Use

There are two exceptions to non-qualifying use for your property.

Exception #1:

If the property is your principal residence prior to January 1, 2009, and you otherwise qualify for capital gain exclusion, you don’t need to allocate.

Exception #2:

Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. If you had to leave the property due to employment, health conditions, or other unforeseen circumstances, and you don’t claim another principal residence, then you don’t need to count the time you were gone as non-qualifying use.

Real estate tax laws have gotten very complicated lately. Make sure your CPA is up on the latest changes.


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3 Comments so far:


On January 28th, 2010 | 12:12 pm
Erik said:

So what does this mean for someone who is a snowbird? Say some couple has owned their home for 20 years. 10 years ago they retired and lived full-time in a motor home traveling the country for 2 years. Assume they had renters for those 2 years, then returned and made that home their primary residence for the last 8 years but snow bird to a campground in AZ during the winters?

Do they only count the 2 years it was rented out in allocation?

Does snowbirding count as aggregate absences, even if you don’t claim another principle residence? Does snowbirding meet the condition of “health conditions” so you don’t have to count that absent time?


On January 30th, 2010 | 5:24 pm
John Tam said:

I am sure you are already familiar with the uncertainty in determining your “home” state during your snowbirding times. Many snowbirders would establish a Post Box for their mail for convenience but still would claim their “home” state for tax purposes. I am not aware of a legal position for “gypsies.” May be Diane can shed light on this not unommon situation. I suggest you ask your question in camping magazines that you subscribe to. Good luck and enjoy your motor home travels.


On January 30th, 2010 | 5:46 pm
Diane Kennedy said:

The temporary absence rule means that you’re back in the home at least once every year. It doesn’t sound like that’s the case of the snowbirds.

I think they might be stuck doing some allocations of any gain.

John Tam brings up a good point for snowbirders in general. If they travel from their Minnesota house to their Arizona house, depending on the season, then you look at where they are spending the most time, where they have community ties, where they are registered to vote and where their licenses are held.

But, what if you live in an RV and the world is your home?

Of course, everyone’s circumstances are different, but in the right case, you can choose your home state.

Here’s an interesting site on the things considered before RVers decided on Kentucky:

http://www.rv-dreams.com/home-base-selection.html



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