Home Sale Tax Exemption Loopholes
Profit Ability Article Highlight

Just about everyone has heard of the IRS rule allowing joint filers to realize $500,000 in tax free income from the sale of a residence. It is also common knowledge that you must live in the home two out of the preceding five years to enjoy this benefit. With the recent years' rise in home prices, many homeowners are looking for a way to cash out.

However, many of these homeowners do not qualify for the $500,000 exemption because they have yet to use the appreciated property as a primary residence for the minimum two years. If you are one of these people, read on. There are some instances wherein you can take advantage of the tax exemption without meeting the residency requirement.

Job Change: An exemption is allowed if the taxpayer (yourself, your spouse or a co-owner of the home) is required to move for a work-related reason, meaning that the new place of work is at least 50 miles farther from the old home than the old workplace was from that home.

Disability: There is an exception allowed if, during the 5-year period before the sale of your home you become physically or mentally unable to care for yourself.

Health of Another: An exception is allowed if the primary reason for the sale is to obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury of a qualified individual or certain close relative. A physician's recommendation is necessary. Following is a list of qualifying relatives: parent, grandparent, stepmother/father child, grandchild, stepchild, adopted child, brother, sister, stepbrother/sister, mother-in-law (we don't recommend moving for this reason), father-in-law, sister/brother-in-law, son/daughter-in-law, aunt, uncle, nephew, niece.

Unforeseen Circumstances: A sale will be considered necessary if due to "unforeseen circumstances" such as divorce, death or legal separation, natural or manmade disasters and other financial hardships. Also included are certain unemployment or changes in employment that affect your financial situation. Lastly, multiple births from the same pregnancy could allow you to claim the exemption without meeting the residency requirements.

Buy, Live, Rent & Sell: While many people understand this issue, there still exists a fair number of people who do not understand the eligibility requirements for taking the $500,000 tax-free gain. All you have to do is live in the home for two out of the last five years. So you can indeed still enjoy the tax-free gain if you purchase a home, live in it for two years and then turn it into a rental property. As long as you sell the property within three years of your living there, you are in the clear.

Other Safe Harbors: Some other "safe harbors" exist wherein a taxpayer can take advantage of the exclusion without having owned the home in question for the required time. Call for more information.

Note: For each of these exceptions to the rule, certain limitations apply.

Please contact Talley & Company before taking any actions based on the information in this article.