'SENIOR CITIZEN' TAX BREAK A ONCE-IN-A-LIFETIME DEAL (2024)

The most important tax benefit available to the homeowner is the "senior citizen tax exemption."

However, the name is a misnomer. We now recognize that at age 55, one is really not a "senior citizen."

The once-in-a-lifetime exemption permits the taxpayer to exclude as much as $125,000 of the profit from selling a principal residence, under certain conditions.

First, the taxpayer must be at least 55 before the date of sale. Turning 55 in the year the property is sold does not meet the legal requirement.

Second, the exclusion applies only to the sale of the principal residence. This includes condominiums and cooperative apartments, but not a second home.

Third, the taxpayer must have owned and used the property as his or her principal residence for a total of at least three years during the five-year period ending on the date of the sale.

However, in 1988, Congress modified this three-year requirement for taxpayers who are physically or mentally incapable of self-care and who reside in any facility (including a nursing home) licensed by a state or political subdivision to care for an individual in the taxpayer's condition. Under these circ*mstances, the taxpayer only has to have lived in the property for at least one year during the previous five-year period.

If you meet these tests, you are entitled to deduct as much as $125,000 of your profit from the sale of your home. If you are married -- but file separate tax returns -- the maximum exclusion is $62,500 for each return.

A historic review of this legislation reveals an interesting aspect of the U.S. housing economy. The law was enacted in 1964. At that time, the exclusion was $20,000. In 1976, it was amended to $35,000, and then changed to $100,000. Finally, in 1981, Congress raised the limitation to $125,000, where it has remained.

It also should be noted that if two nonmarried people own property, and meet all of the legal requirements of Section 121 of the Internal Revenue Service code when the property is sold, both are entitled to take as much as $125,000 as an exclusion from their taxes. For example, if two sisters live in a property for many years, when it is sold, if they have made a profit of $250,000 or more on the sale of the house, each can take a $125,000 exclusion if they both own the property equally.

Although the rules sound relatively simple, there are some significant complications.

For example, if a man who has already taken the once-in-a- lifetime exemption marries a woman who otherwise would be entitled to the same exemption for her property, she then loses that right. The Internal Revenue Code seems to encourage couples not to marry until they have taken their once-in-a-lifetime exclusion. In IRS jargon in this case, the husband is known as a "tainted spouse."

Example: You and your prospective spouse are both over 55. Each of you owns a home that originally cost $50,000, and each home is now worth $200,000. Together, you would have a gain of $300,000. If you married before you sold your respective houses, you would be limited to one exemption of $125,000.

If, on the other hand, you both sell your houses before you marry, you can each exclude the $125,000, for a total of $250,000 worth of exemption.

Furthermore, in the example of selling the house before marrying, each sold a house for $200,000. Each would take the $125,000 exclusion. This means that each is eligible to roll over the profit into a property costing at least $75,000 each. By pooling their resources, as long as their new house costs at least $150,000, in this example, they will be able to combine the once-in-a-lifetime tax exemption with the profit rollover, and pay no taxes.

As discussed earlier in this series, the rollover is mandatory. However the once-in-a-lifetime exemption is optional; the taxpayer can choose to take -- or not to take -- the once-in-a-lifetime exclusion when he or she deems it desirable.

If your circ*mstances have changed, the law permits the election to be revoked at any time before the latest of the following dates: Three years from the due date of the federal income tax return for the year of sale; three years from the date the return was filed; or two years from the date the tax was paid.

If the taxpayer is married, the revocation may be made only if the spouse joins in the revocation.

Tax considerations are perhaps the most important aspect to be reviewed when deciding whether and when to sell your house. As has been discussed previously, it is very important that before you sign any real estate contract, you consult with your tax advisers.

NEXT: The principal residence.

Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.