Don’t forget about this when selling your home

One issue that pops up regularly from clients and friends revolves around the sale of a personal residence.

It used to be that you could roll over the capital gain from your personal residence to a new home as long as the new home cost more than the old home’s sale price. That allowed you to defer the gain from the old residence into the tax basis of the new home. But this was just a deferral of the gain, not an exclusion.

At some point when you sold that property, you would have to pay tax on the final gain, which, due to increases in value, could be huge, unless you bought another home and deferred the capital gain again.

But there was a $125,000 exclusion that was available for folks older than 55. As you might expect, there were lots of provisions dealing with issues like holding period, partial business use, etc. But all that changed in 1998 and was replaced by a new set of rules included in the Taxpayer Relief Act of 1997. But there are still a lot of folks who think this old rule is still in place.

Effective in 1998, the new basic rule is this: If during the five-year period ending on the date of sale you own and use your old home for at least two years as your principal residence, you can exclude up to $250,000 of the capital gain if single, and up to $500,000 of capital gain if you are married.

There is no rollover of gain anymore and no age requirement for the exclusion. Even if there is no taxable gain, you still have to report the sale of your tax return though. And, just as in the past, there are numerous provisions dealing with partial business/rental use and other circumstances.

There are lots of wrinkles in the law. People who try to figure it out on their own often end up scratching their heads. If you are thinking about selling your home and have questions, feel free to reach out to me. I am here to help.