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   Claim a Prorated Tax Break

If you’ve been living in your home for awhile, you're probably sitting on a tax gold mine. Not only are real estate prices soaring in many areas, the tax law allows a married couple filing jointly to pocket up to $500,000 of gain without owing and federal income taxes from a home sale if they have owned and used the home as a principal residence for two out the previous five years. Unmarried or married taxpayers filing separately can pocket a gain of up to $250,000 without owing any federal income tax.

There is no limit on the number of times you can exclude the gain on the sale of your principal residence as long as you wait at least two years between sales and meet the ownership and use tests.

More Than One Home?

    IRS regulations list several factors that help determine which home is the principal residence.
They include: the amount of time the home is used; place of employment; where other family members live; the address used for tax returns, driver’s license, voter registration, bills and correspondence; as well as the location of banks, religious organizations and recreational clubs.

Special Tax Break for Military Personnel

    A taxpayer on qualified official extended duty in the U.S. Armed Services or the Foreign Service may suspend for up to 10 years of such duty time the running of the 5-year ownership-and-use period before the sale of a residence. This applies when the duty station is:
     At least 50 miles from the residence or
     While the person is residing under orders in government housing.

What if you don’t meet the two-out-of-five-year rule? Fortunately, you may still qualify for a partial exclusion. IRS regulations make it easy for many people to collect the tax break after "premature" sales of their residences.

The regulations clarify the rules for certain “safe harbors” the IRS has approved. Here’s a quick roundup:

  • If you’re forced to move due to a job change, you can claim a partial exclusion if your new job is located at least 50 miles farther from the old home than that home was from your old job.

  • You can claim a partial exclusion for “health reasons” if you’re selling the home due to treatment of a specific illness or disease and the move is recommended by a physician. The health condition could involve you or a parent, child or other relative. However, the move that causes the premature home sale cannot be done merely to benefit your (or a family member's) general health and well being.
  • The regulations provide a laundry list of unforeseen circumstances that could cause a qualifying premature sale including destruction of a home by a hurricane, divorce or separation and multiple births from a single pregnancy. The triggering event must be one that you “could not have reasonably anticipated.”

How much of the home sale exclusion do you get after an eligible premature sale? You are allowed a percentage of the regular $500,000 or $250,000 limit, depending on how much of the two-year ownership and use test was satisfied.

Effective dates: The regulations apply to sales after August 12, 2004. But you might be able to take advantage of an election to apply the rules retroactively to earlier sales. Ask your tax adviser if you qualify to file an amended return and claim a refund.


Virtualex.com Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email: ron@taxesq.com

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