Home Sale Exclusion: New Provision
An individual homeowner can exclude up to $250,000 ($500,000 if married) on gain realized on the sale of a principal residence. To be eligible for the exclusion, the home must have been used as a residence for at least two of the five years ending on the date of sale. An individual or couple owning more than one home could double the value of the tax deductions by careful timing, i.e., living in one home for two years, selling it and excluding up to $500,000 of any gain, then moving into the second home and treating it as a new primary residence and selling it after two years and once again taking the exclusion. The new housing law, in order to prevent such a double exemption, provides that a homeowner cannot exclude the gain from a sale that includes periods of “non- qualified use.” This includes any period (beginning in 2009) when the home is not used by the homeowner as a principal residence. Use of the home as a vacation home, or as a rental property, would be considered to be nonqualified use.
Example 1. Assume a person buys a property on January 1, 2009, for $400,000, and uses it as rental property for two years while claiming $20,000 of depreciation deductions. On January 1, 2011, the person converts the property to a principal residence. On January 1, 2013, the person moves out and sells the property for $720,000. As under present law, the $20,000 gain attributable to the depreciation deductions is included in income. Of the remaining $320,000 gain, 40 percent of the gain (2 years divided by 5 years), or $128,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the remaining gain of $192,000 is less than the maximum $250,000 exclusion, the $192,000 is excluded from income.
Example 2. Assume an individual buys a principal residence on January 1, 2009, for $400,000, moves out on January 1, 2019. On December 1, 2021, the property is sold for $600,000. The entire $200,000 gain is excluded from gross income, as under present law, because periods after the last qualified use do not constitute nonqualified use.
Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Michael Fritton, CPA. Whether you are a building owner, building manager, real estate developer, real estate professional or an investor, we hope to provide you with timely information so you may be proactive in making your business decisions.
This article was written by and published herein with the permission from professionals of BDO Seidman, LLP. Robert Klein, CPA, is a Tax Partner in BDO Seidman’s New Jersey office. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
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