Tax Tips for Homeowners: J.K. Lasser's Your Income Tax 2007

Added November 27, 2006 by Ilyce R. Glink

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Summary: Ilyce reviews J.K. Lasser's Your Income Tax 2007. Although nothing much changed for homeowners and home sellers this year, it's worth going over the tax basics for those who made a move in 2006. If you're not sure what applies to you, talk to your accountant or tax preparer.

The 2007 tax season has officially begun.

Last week, I received my copy of J.K. Lasser's Your Income Tax 2007 (Wiley, $17.95, www.jklasser.com) - all 816 pages worth. The book covers all of the changes to the tax code over the past year. Those that were enacted after the day it went to press are available online.

While nothing much changed for homeowners and home sellers this year, it's worth going over the tax basics for those who made a move in 2006.

If you sell your principal residence, you may keep up to $250,000 if you're single (and up to $500,000 if you're married) in profits tax free. To allow that gain to be excluded from your income, you must have owned and lived in the home as your primary residence for at least two of the past five years. You can only take the exclusion once every 24 month.

What if you didn't live in the house long enough? You might be able to keep a portion of your profits tax-free if you sold because of a change in the place of employment, health reasons, or what the book refers to as "unforeseen circumstances."

Unforeseen circumstances include the involuntary conversion of the home, damage from a natural or man-made disaster, war or act of terrorist, death, divorce, legal separation, becoming eligible for unemployment compensation, or change in employment or self-employed status that left the homeowner unable to pay housing costs and reasonable basic household expenses.

According to the IRS, an unforeseen circumstance might also include "multiple births resulting from the same pregnancy." So if you have twins or triplets, and have to sell your home before you've lived there for two years, you might also be able to keep a portion of the profits tax free.

But if you decide to sell because you got a huge raise and a promotion, don't expect the IRS to give you a helping hand.

The so-called "safe harbor" provisions allow you to take a reduced maximum exclusion. So if you lived in the home for 18 months before selling it (three-quarters of the required 2 years), you could keep up to 75 percent of the $250,000/$500,000 maximum exclusion (up to $187,000 if you're single or up to $375,000 if you're married) tax free.

Another interesting fact is that in addition to you, there are others who can help you qualify for the safe harbor provisions of the law, including your spouse, a co-owner of the residence, or any person whose main home was your principal residence. When it comes to the "health reasons," category, qualified individuals also include parents or step-parents, grandparents, children, stepchildren, adopted children, grandchildren, siblings, in-laws, uncles, aunts, nephews or nieces.

While a lot of energy is focused on helping you keep your profits tax-free, there is no tax benefit if you lose money when you sell your home. Unfortunately, the IRS does not allow you to write off any home-related losses in the same way you would write off losses taken in the stock market.

If you're not sure what applies to you, talk to your accountant or tax preparer.

Published: Nov 27, 2006

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