GAIN ON SALE OF PRINCIPAL RESIDENCE

Homeowners can exclude up to $500,000 in gain from the sale of a principal residence regardless of age ($250,000 for single taxpayers). This differs greatly from the old law that included deferral rules and provided a one-time exclusion of up to $125,000 for taxpayers over the age of 55. This new exclusion applies if you have owned and used the home as a principal residence for at least 2 of the 5 years before the sale. In general, this exclusion can only be used every two years. Under certain circumstances, a prorated amount will be excluded if the home was used as a primary residence for less than two years.

Please note that the new long-term capital gains rates (15% down from 20%) apply for the amount of the sale that is not covered by the exclusion and is eligible for long-term treatment.

IMPACT OF CHANGES ON SALE OF PRINCIPAL RESIDENCE GAINS

Most homeowners will benefit from this change because they are not forced to trade up in order to obtain a deferral of gains. Almost everyone is relieved of the burden of keeping paperwork on improvements that add to the basis of the property.

For those with gains over $500,000, the changes are not as favorable since gains over this amount will be taxed at the capital gains rate that applies. The previous law allowed deferral of gains under certain circumstances. For example, under the old rules, if your sale resulted in a gain of $600,000, you could defer tax on that gain under specific circumstances. Under the new law, a portion of that gain ($100,000 if $500,000 exclusion applies) is taxable in the year of sale.

For more details on the exclusion, click on the picture