• Four rules to avoid principal residence sale reporting.
• What is a principal residence?
• Can divorced or separated spouses each qualify for an exemption?

• Can I to take repeated advantage of the principal residence tax exemption?
• Are partial exclusions allowed?
• Where do I report profitable home sales over $250,000 or $500,000?
  
  
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Four rules to avoid principal residence reporting.

Well what do you know, the IRS is actually trying to make it easier for taxpayers to claim exemptions and reduce forms and paperwork!

If you sold your principal residence for less than $250,000 (less than $500,000 for a married couple filing jointly if both qualify), your sale profit is tax free and you don't even have to report the sale on your income tax return. The IRS even eliminated Form 2119 for Sale of a Residence.

You must meet four rules to avoid having to report the sale on your income tax return. These four rules require that:

1. No part of your home was used for business or rental purposes, and ...

2. The selling price of your principal residence sold in the tax year was not over $250,000 ($500,000 if married filing a joint return), and ...

3. You (or your spouse if filing a joint tax return) have not sold or exchanged another principal residence after May 6, 1997, and ...

4. You (or your spouse if filing a joint tax return) owned and lived in the home as your principal residence an aggregate total of at least two of the last five years before the sale date. However, if you don't meet the occupancy test due to a disability that forced you to live in a licensed nursing home or other facility, but you lived in your home for at least 12 months, you can still qualify for the exemption.

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What is a principal residence?

The IRS defines your principal residence as your "main home". It's your address for such activities as voting, filing income tax returns, working and having a driver's and/or business license. It's also the place where the you spends the most time (except for temporary absences such as vacations).

You cannot have more than one principal residence at the same time. however, a husband might live in one principal residence and the wife can live in another principal residence. Each can then qualify for up to $250,000 of tax-free sale profits if the other test are met. Your part-time or vacation homes do not qualify as a principal residence.

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Can divorced or separated spouses each qualify for the exemption?

Yes, he IRS has a unique feature allowing divorced or separated spouses to each qualify for up to $250,000 principal tax-free sale profits if one spouse qualifies. This situation often occurs when one spouse lives in the family home, perhaps until the youngest child is 18 or 21, and then the residence is sold. The "in spouse" living in the principal residence obviously qualifies for up to $250,000 tax-free profits. However, the new law now allows the "out spouse", who hasn't lived in the principal residence for many years, to also qualify for up to $250,000 tax-free-profits.

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Can I to take repeated advantage of the principal residence tax exemption?

Yes, there is no limit to the number of times the $250,000/$500,000 principal residence tax exemption can be used. You do not have to buy a replacement principal residence to qualify for the exemption.

For example, a young couple can buy a modest home, perhaps add some improvements, and sell it for up to $500,000 tax-free profits after as little as two years of ownership and occupancy. They can then do it all over again with another residence if they wish.

The principal home exemption cannot be used more frequently than once every two years. However, it enables homeowners to create a tax-free mini-business of buying, fixing up and profitably reselling their principal residence as long as the two year and ownership/occupancy rules are met.

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Are partial exclusions allowed?

Yes, when homeowners find they must sell their principal residence after less than two years of ownership and occupancy, there are some partial exclusions allowed. If the reason for the sale is a job transfer or health problem, then a partial exclusion is available. IRS Publication 523 provides worksheets for calculating partial exclusions due to short-term residency. The $250,000 exclusion is reduced by the number of days less than 24 months the residence was not owned and occupied by the seller.

Where do I report profitable home sales over $250,000 or $500,000

Many home sellers have profits above the $250,000/$500,000 exclusions. In 1998 the IRS eliminated Form 2119 for reporting home sales. Taxpayers now have to use Schedule D to report their long-term capital gains exceeding the $250,000/$500,000 exclusions.

This is my understanding of the current tax laws. Tax laws do change and can be difficult to follow. Please consult your tax advisor concerning current tax laws and all other tax questions.

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