Capital Gains Exclusion on Your Home!
I've seen much confusion about the requirements for that tax free capital gaines exclusion on the homes we have lived in. Let me try to explain briefly:
We all know that if you live in your primary residence for the past 2 out of the 5 years single people can exclude $250,000 (married $500,000) of capital gaines taxes.
A. Definition of living in the home does not necessarily mean you are living there all the time. The code allows for temporary absenses. A "temporary absense" is defined as anything less than 1 year.
B. IRS explained the code for us in further detail in December 2002. If you live in your house for less than two years and you have to move due to "unforseen circumstances" then you can prorate the gain. Lets say that you lived in your house for 1 year or 1/2 the 2 year mark, you are allowed 1/2 the limit above ($125,000 for single, $250,000 for married).
This does NOT mean that if your gain was $60,000, for example, that you have to pay taxes on $30,000.
Now, what is an unforseen circumstance? Here is a (partial) list:
1. Multiple births from the same pregnancy
2. diability
3. change in employment
4. change in self employment
#4 is the key! This doesnt mean that anything drastic happened. Maybe you made more money, made less money, changed the name of your company, or started a small business.
How easy is that? The government always amazes me how it allows us to legally pay less taxes!
You can listen to Garrett Sutton, attorney, interviewing Diane Kennedy, CPA, both members of Robert Kiyosaki's rich dad's advisors series talk more about "home loopholes" at:
http://boss.streamos.com/wmedia/wsradio/successdna/092203/segment1.asx
(Windows Media Player)
I'm not an accountant or tax attorney. This is not legal advise. I always preach to see a competent acountant. Use a team to guide you through your financial sucess!
To meet the unforeseen circumstances test, things better have gotten economically WORSE for you ... except perhaps for the situation where the wife turns up expecting twins! Otherwise, you're not within the safe harbor, and your "facts and circumstances" probably won't justify the IRS examiner giving you any kind of break!
http://www.swlearning.com/tax/wft/wft_2004/wft_2004_biz_entities/ch06/diggingd/digging_deeper.html#13
Keep in mind that this, too, is only an opinion. The actual treasury decisons do not go into this much detail. Obviously it is best to just live in a home for two years and most people who do have to move should qualify for an unforseen circumstance.
Always seek the advice of a competent tax advisor.
What if my wife is expecting twins and we sell the home to prepare for the new change (current home is too small)? Also, we are moving closer to the specialist (perionatoligist) to treat her over the next 5 months. Will the exemption be based on our home sale date, even though they are not yet born?
My wife and I purchased a second home in August 2003. We are family child care providers, and I established residency at this second home to open a second licensed family child care home. Our long-range plans were to eventually turn this family child care home into a day care center, but ran into zoning restrictions. So, we decided in December 2003 to turn the property into a rental, and rented it out at that time. Now (March 2004) I am moving out of the area to take a new job in another state. We purchased the property in August 2003 for $205,000 and are selling it now (March 2004) for $279,000. How do I compute the capital gains tax, and can I prorate the tax based on the fact that I am moving out of state to take a new job?
David Webb