KEEPING THE IRS OUT OF YOUR HOUSE

Many people aren’t aware of the fact that in 1997 Congress changed the tax laws governing the recognition of gain on the sale of a principal residence. Under the new law, a taxpayer can exclude up to $250,000 of gain realized on the sale of a residence, if for at least 2 of the 5 years immediately preceding the sale the taxpayer owned and used the property as a principal residence. (A married couple can exclude up to $500,000 of gain, if the requirements of the law are met.)

In October 2000, the IRS published new regulations dealing with the exclusion of gain on sale of a principal residence. Since housing prices in this area of the Garden State have risen dramatically in the past 2 years, Monmouth County residents should be aware of these new laws. This is particular true for elderly individuals who may have owned their home for 40 or more years, paying, perhaps, $10,000 for their house in 1950.

The gain realized on the sale of such a house could be hundreds of thousands of dollars, and without the $250,000/$500,000 exclusion, the tax liability could be enormous. There are a growing number of elderly individuals who are selling their family homes, so they can enter long-term care facilities, such as assisted living residence. Faced with the burden of paying in excess of $3,000 per month for their care, the ability to save as much of the proceeds of sale as possible is important.

The first question that needs to be answered is, is this the taxpayer’s principal residence. If you have one house, this isn’t an issue. But what if you have a vacation home, say in Florida, and you alternate between the two houses. If you sell your house in New Jersey to move to Florida, but you were spending more and more time in Florida in the years preceding the sale of the New Jersey property, is the New Jersey residence your principal residence. To answer this question, the IRS tells us that the property the taxpayer used the majority of the time is the principal residence.

In order to satisfy the “ownership and use” requirements, the taxpayer must own and use the home as a principal residence for 2 of the 5 years preceding its sale. The 2-year period of time need not be concurrent months. In other words, if the taxpayer owned the home for 3 years prior to sale: living in the home in year 1, renting it in year 2, and living in it, again, in year 3, the taxpayer would have satisfied the 2 year ownership and use requirement. Short absences from the home, such as for vacation, will not interfere with the 2-year requirement.

The exclusion will not apply if during the 2-year period ending on the date of sale of the current residence the taxpayer sold another principal residence in which gain was excluded. This is the “one sale every two year rule.” In our highly mobile society, this could be an issue.

Finally, as stated, the exclusion from gain on the sale of a principal residence is $250,000 for an individual and $500,000 for a married couple, filing jointly. For such a married couple, the $500,000 exclusion is available if either spouse satisfies the 2 year ownership requirement; both spouses satisfy the 2 year use requirement; and neither spouse is ineligible for the exclusion by reason of the “one sale every two years” rule.