Q: I bought a home in 1994 and lived in it until 1998. From 1998 until 2003, I rented out the property and deducted it on my federal income taxes.
I moved back in the property about a year ago. I have recently been determined to be disabled by Social Security, and my son is now in Denver, fighting cancer.
Is there a way to sell my house and avoid capital gain taxes due to illness? I want to be in Denver with my son rather than here. I’m a single mom. Thanks for your help.
A: Typically, you have to live in your home as a primary resident for two of the past five years in order to take up to $250,000 (if you’re single, up to $500,000 if you’re married) in capital gains tax free. Since you moved back into your home on 9/21/04, you wouldn’t qualify under the regular rules.
However, the IRS has recently loosened some of these restrictions for people who have to sell because of medical reasons, divorce, and other personal calamities in life. Given your medical condition, I believe this would apply to you.
What the IRS allows you to do is to take a proportionate share of the sales tax free. For example, let’s say you sold on 9/21/05, you would have lived in the property as your primary residence for a year, so you’d be able to take half of the maximum amount of capital gains tax free, or up to $125,000 if you’re single, and up to $250,000 if you’re married.
However, you would still have to recapture any depreciation you took from the years the property was a rental.
You might want to read up on the rules for yourself. Go to IRS.gov and check out Publication 523, “Selling your home.” Your accountant or tax preparer can guide you further.