What you need to know about Tax Laws and House Sales

Sale of Principal Residence Gain Exclusion

When I was recently in practice, several past clients had been misinformed about the current tax laws regarding the sale of their principal residence.  Many thought they had to roll over their gain into another residence which is incorrect. This relates back to an old tax law prior to May 6, 1997.  If you sell your principal residence and there is a gain on the sale, you can exclude up to $250,000 (if single or head of household) and up to $500,000 if married filing joint (Code Sec. 121).  The exclusion is applicable if during the 5 years prior to the date of sale, you used the property as your principal residence for at least 2 years (not necessarily consecutive).  Also, you generally must not have excluded again from another principal residence within the last 2 years prior to the date of sale (however, there are certain statutory exceptions).  If you rented your principal residence out or used part of the residence as an office in home with depreciation claimed since May 6, 1997, the depreciation is recaptured as Code Section 1250 gain and the balance of the gain would be excluded.  

Gain from the sale of your principal residence sale is calculated as follows:  Gross sales price less applicable selling expenses less your cost basis in the property (including major capitalized improvements) less any depreciation claimed after May 6, 1997.  If you are widowed and the property was held jointly in the past, cost basis of the property is determined based on ½ of the property fair market value at date of death of deceased spouse plus ½ of original cost plus ½ of improvements counted for survivor’s portion and then 100% of improvements after date of death added. Another adjustment that may be needed is to determine if you had a gain rollover to your residence being sold (under old tax rules prior to May 6, 1997). To check this, you will need to locate your old tax return back to the date of the old residence sale that should have included Form 2119.  Any gain rollover to the residence currently sold would be a reduction in the cost basis.

Mark White, CPA

Controller,Estuary Council of Seniors, Inc.

Estuary Council of Seniors, Inc. and their employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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