Clarifying IRS Primary Residence Tax Exemption
REM # A583
By Ilyce R. Glink
Summary: Ilyce clarifies the IRS tax exemption regarding living in a residence for 24 months of last 5 years.
Q: You recently answered a question regarding capital gains tax treatment that I found confusing.
I believe you said that the IRS requires you to live in the house for two of the last five years in order to keep the gain tax free.
Is it five years or two years that I need to live in my house before I sell it? I’ve currently lived in my house for 3 years, which is the entire time I’ve owned it. Can I now take my gain tax free?
A: Happily for you, the IRS requires only that you live in the home as your primary residence for two of the last five years. You get to pick which two of the five years to count. So, if you lived in the home five years ago and four years ago, and then rented it out for the last three years, you should still be able to use the capital gains exclusion.
If you have owned the property for 3 years, and lived there the entire time, you may take up to $500,000 in profits tax free if you're married or $250,000 in profits if you're single.
The IRS has recently clarified the rules for those who have lived in their home for less than the 24 month requirement.
In cases where you had to sell in less than two years because you took a new job that was 50 miles away from your old one, got sick, or due to terrorism or other special hardship cases, you may still be able to take a portion of your profits tax-free. In addition, if you are a member of the uniformed services or Foreign Service, you may also be excluded from the 2-year ownership requirement.
These new rules date back to any house that was sold after May 6, 1997. If you paid tax on your gain, you may be entitled to a refund. Talk to your tax advisor for details.
You can also read the new rules in the newly-revised IRS Publication 523, which can be downloaded at the IRS website, www.irs.gov.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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