One of the most misunderstood concepts that I have experienced over many years as a tax return preparation specialist is what happens to proceeds from the sale of a home? Is it taxable? Do I have to claim it on my tax return?

First of all, you can sell your principal residence of which you have lived in for 2 of the past 5 years and have up to $250,000 of gain if single or $500,000 if married without having to pay any capital gains tax on it. It is important to note that I said gain, not sales price. For example if you purchased a house in 2003 for $150,000 and it was the only home that you lived in, you could sell it for $400,000 if single or $650,000 if married and not have to pay any capital gains tax.

Now, even if you do not meet the 2 out of 5 year ownership requirement you are entitled to a reduced maximum exclusion limit if the primary reason for your sale was a change in your place of employment, health reasons, or unforeseen circumstances. For example, a taxpayer who sold his home in order to acquire the space needed to care for his recently disabled wife was entitled to a partial exclusion. The IRS ruled that the sale in this case was because of a qualifying health reason of the homeowner.

Regulations contain several situations that constitute unforeseen circumstances, including divorce, casualty, or multiple births from the same pregnancy. The IRS continues to expand the definition of unforeseen circumstances. Recently the IRS has held that a move caused by crime in the neighborhood was an unforeseen circumstance, allowing the homeowner to claim a partial exclusion on his tax return.

A partial exclusion is figured by multiplying the dollar limit ($250,000 for single or $500,000 if married) by a fraction, the numerator of which is the number of days of ownership and the denominator of which is 730 days. To illustrate: You are a single person and purchased a home for $300,000 90 days ago and have now been transferred by you employer across the country. You would multiply $250,000 by (90 / 730) and see that you would be able to sell your home for a gain of up to $30,821 and not have to pay any capital gains tax on it.

If you have any questions regarding the home sale exclusion or any other tax preparation return related matters or if you would like us to help in the preparation of your income tax return this year please contact us at (651) 647-4935 or email us at