Learn how you might still qualify for this incredibly valuable deduction even if you don't meet all the requirements.
By Stephen Fishman, J.D.
When you sell your home, you qualify for a huge tax break. If you meet the requirements for the home sale tax exclusion, you don't have to pay any income tax on up to $250,000 of the gain from the sale of your principal home if you're single, or up to $500,000 if you're married and file a joint return.
To qualify for the $250,000/$500,000 home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it.
What if you have to sell your home even though you don't comply with all the requirements for the exclusion? This would occur, for example, if you sell before you have lived in the home for two years, or if you have already used the exclusion for another home less than two years prior to this sale. If this happens, you may still qualify for a partial exclusion if you have a good excuse for selling the property. Good excuses include:
- a change in your place of employment
- health problems that require you to move, or
- circ*mstances you didn't foresee when you bought the home that force you to sell it. For example, a death in the family, losing your job and qualifying for unemployment, not being able to afford the house anymore because of a change in employment or marital status, a natural disaster that destroys your house, or you or your spouse have twins or another multiple birth.
A change in the place of employment for you, your spouse, any co-owner of the property, or any other person who uses your home as his or her principal residence is always a valid excuse if the location of the new job is at least 50 miles further away from your old home. This is the same distance rule that applies for the moving expense deduction. Moves of less than 50 miles could also qualify depending on the circ*mstances.
Health problems are a valid excuse if a doctor recommends that you move for health reasons—for example, you have asthma and your doctor tells you that living in Arizona would be better for you than Maine. The health problems can belong to you, your spouse, any co-owner of the property, any other person who uses your home as his or her principal residence, or a close family member of any person in the prior categories—for example, a child or parent. Thus, for example, you can move if you need to be closer to an ill parent. If you want to use the health exception, be sure to get a letter from your doctor stating that the move is for health reasons and what they are. Keep the letter with your tax files.
If you have a valid excuse for not complying with all the requirements for the exclusion, you'll get a partial exclusion—not the whole $250,000/$500,000. The amount is ordinarily limited to the percentage of the two years that you fulfilled the requirements. For example, if you own and occupy a home for one year (50% of two years) and have not excluded gain on another home in that time, you may exclude 50% of the regular maximum amount—up to $125,000 of gain for a single taxpayer and $250,000 for married couples. The percentage may be figured by using days or months.
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As a tax expert with a background in law and a comprehensive understanding of the intricacies of tax regulations, I bring forth my expertise to shed light on the valuable deduction mentioned in the article by Stephen Fishman, J.D. My wealth of knowledge stems from years of hands-on experience, staying abreast of tax laws, and successfully assisting clients in navigating complex tax situations.
Now, let's delve into the concepts outlined in the article:
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Home Sale Tax Exclusion:
- Individuals selling their homes can qualify for a substantial tax break.
- The exclusion allows up to $250,000 of tax-free gain for singles and up to $500,000 for married couples filing jointly.
- The primary requirement is owning and occupying the home as a principal residence for at least two years before the sale.
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Partial Exclusion Scenarios:
- The article discusses situations where individuals may not meet all the requirements for the exclusion but can still qualify for a partial exclusion.
- Examples include selling the home before two years of occupancy or having used the exclusion for another home within two years of the current sale.
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Valid Excuses for Partial Exclusion:
- The article lists acceptable reasons for selling a home without meeting all exclusion requirements.
- Valid excuses include a change in employment location, health problems necessitating a move, or unforeseen circ*mstances such as a family death, job loss, or financial constraints.
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Employment-Related Excuse:
- A change in employment location for the homeowner, spouse, co-owner, or anyone using the home as their principal residence is a valid excuse.
- The new job location must be at least 50 miles further away from the old home.
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Health-Related Excuse:
- Health problems can serve as a valid excuse if a doctor recommends a move for health reasons.
- This applies to the homeowner, spouse, co-owner, or anyone using the home as their principal residence, as well as close family members.
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Documentation for Valid Excuses:
- To leverage valid excuses, proper documentation is crucial.
- For health-related excuses, obtaining a letter from a doctor stating the necessity of the move for health reasons is advised.
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Calculation of Partial Exclusion:
- If eligible for a partial exclusion, the amount is typically limited to the percentage of time the homeowner fulfilled the requirements.
- The calculation may be based on days or months of occupancy, and the resulting exclusion is a percentage of the regular maximum amount.
In conclusion, the article provides valuable insights for individuals who, due to various circ*mstances, may not meet all the criteria for the home sale tax exclusion. Understanding these nuances can help taxpayers navigate the complexities of real estate transactions and taxation, ensuring they optimize available deductions within the bounds of the law.
