Pending home sales picked up a bit in May, according to the National Association of Realtors. The number of homes under contract matched the highest level in the past two years, and was much better than the May 2011 figures.
If those deals actually close and the sellers are able to turn a profit, much if not all they make on their residential sales will be tax free.
Old vs. new home sale tax rules: Once upon a time, home sellers younger than 55 had to roll any profit they made on a house into a new, higher price piece of residential property.
Sellers age 55 or older back then could take a one-time exemption from tax on up to $125,000 in home sale profit.
But on May 7, 1997, that all changed. That day the Taxpayer Relief Act of 1997 became law and home sale profit rollover or once-in-a-lifetime exclusion options were replaced with a new tax treatment of home sales.
Now when you own and live in a house as your primary residence for two of five years before you sell, you can exclude up to $250,000 in profit from tax. For joint sellers, the exclusion amount is $500,000.
And this home-selling tax break is today's Weekly Tax Tip.
Wait, there's more: Of course, we're talking taxes here so there are some other things to think about.
Take, for example, the ownership and occupancy requirements for couples. If just the husband or wife is the owner, that's fine. The IRS will accept the one-spouse on the deed for the ownership test. But both of you must live in the house the requisite length of time — two years — to pass the use test.
You'll also need to accurately figure the amount of profit. To do that, you must have your home's correct basis, which is basically your cost plus any improvements. You subtract your basis from the sales price you get and that's your profit, which ideally is entirely excluded from tax.
And don't forget about all those years you claimed a home office deduction. While your profit might be well within the exclusion amount for your filing status, you'll still owe tax on the home work space's depreciation even if you didn't actually claim it when you filed.
But despite these complications, the home sale tax exclusion still is one of the best tax breaks around. Just keep that in mind as you're going through the annoying sales process.
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Los Angeles Real Estate
How do you go forward with getting a credit like this?
JoeTaxpayer
Wow, Kay, 1997? Time sure flies.
I recall a coworker in his early 60’s. He called me into his office to tell me that he felt like he just hit the jackpot, as before he could tell his boss he was giving notice, he found the company was offering an early retirement package, 2 weeks pay for each year worked. He basically got a year’s severance he wasn’t counting on.
But that wasn’t the end of the story, he started to say that he and his wife were going to move from the Boston area to a comparatively low cost part of the country, that he’d never be able to spend the same or more for the new house. When I explained to him the new law exempted $500K for him, I thought he was about to cry, he was so happy. His gain was just under that, and this was another windfall for him. 15 years later I remember that conversation as if it were yesterday.