Capital Gains Exclusions

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Real Estate

HouseCapital Gains Exclusions

Determining your principal residence according to the IRS for tax purposes if you own more than one home can be interesting, However,IRS continues to change and update the rules. First, your  principal residence can take many forms: conventional home, condominium, mobile home, house trailer, tenant-stockholder cooperative housing unit—even a boat, as long as it has sleeping, cooking and sanitary facilities (a bathroom), isn't that interesting? 


The challenges occur when you split your time between two different homes during a year., For an example if you own a home in Cape Cod MA or Florida and  the IRS says that your principal residence is the home you own and use as a residence for “a majority of the time during the year.”


But of course, there are other things to consider. For example:

1. the location of your home in relation to your where you work

2. the location where your family members live

3. the address you use on your federal and state tax returns, driver’s license, automobile registration and voter registration card.

4. the primary mailing address you use for bills and correspondence.

5/the location of your financial institution

6/.the location,  of your “religious organizations and recreational clubs.”, likely because it reveals where you spend the most time.


Another challenge; one that can work in you: You can alternate the designation from residence to residence each year according to your personal tax strategies. For instance, if you own a house in Westport MA  and a condo in Naples, Florida, and the condo has appreciated substantially, you’ll want to keep as  much as possible of that gain tax-free through a sale.


You can do this by making your Naples Florida vacation condo your principal residence for two years running by living in it more than six months each year. That qualifies the condo for the maximum capital gains exclusion of $250,000 for single filers or $500,000 for joint filers if you choose to sell the following year.


You then alternate your Westport MA principal residence back to your house.. By living in it and using it for a majority of the time during the two years following the condo sale, it should qualify for the maximum capital gains exclusion.


Also, thanks to legislation, back in 1997,  the good news is that you do not need to be concerned  with replacing your residence with another home with an equal or higher purchase price within a certain time frame. No replacement residence is required now. Fixing-up expenses are no longer a factor in determining the deferred gain with respect to a principal residence. The bad news: taxpayers over age 55 are no longer eligible to exclude $125,000 of gain from the sale of a principal residence.


 As for the capital gains exclusions mentioned above, they apply to one sale or exchange every two years. And the home is not required to be the principal residence when you   purchase or sell, but it must meet ownership and use tests: you must have owned the residence as a principal residence for a total of at least two of the five years before the sale or exchange, and you must have occupied the residence for a total of at least two of the five years before the sale or exchange.


For married people, filing a joint tax return will qualify for the $500,000 exclusion on the joint return provided either spouse meets the ownership test, both spouses meet the use test and neither spouse is ineligible for exclusion because he or she made a sale of exchange of a residency within the last two years. For those marrieds who don’t qualify for the $500,000 exclusion, they may still use the $250,000 exclusion, or a prorated exclusion, if either spouse meets the ownership and use requirements.


Widowed spouses selling their residence typically are only eligible for the $250,000 exclusion on their tax returns filed as a single person, surviving spouse, or head of household. However, they may be eligible for the $500,000 exclusion if the residence is sold during the year of the death of spouse, provided the sale is reported on a final joint return.

 If a taxpayers do not  meet the ownership or residence requirements, a pro-rata amount of the $250,000 or $500,000 exclusion applies if the sale or exchange is due to a change in place of employment, health, or unforeseen circumstances. The amount of the available exclusion is equal to $250,000 or $500,000 multiplied by a fraction equal to the shorter of the number of months of the total of periods during which the ownership and use requirements were met during the five-year period ending on the date of sale, or the period after the date of the most recent sale or exchange to which the exclusion applied divided by 24 months.

When we look at capital gains and investment property,  you will pay capital gains when you sell the property unless you transact using a 1031 exchange. This is another blog for another day.

Disclaimer: Lori Lincoln and Keller Williams are not accountants, so please seek the advice of an accountant or attorney or financial professional prior to making any financial decision.

We are always available to help you with any questions you have about real estate, so please feel free to contact us: text, or call  508-878-0917. email: