$elling Your Home

by Cary Jones

The HBA Spring Showcase will motivate many area homeowners to consider selling their homes. Although the decision to sell your home is never easy, Congress recently made it easier. The Taxpayer Relief Act of 1997 eliminated most people's federal tax liability on the gain from the sale or exchange of their home.

Under the new law, you will have no tax liability for up to $250,000 of the gain from the sale of your home. For certain married couples filing a joint return, your amount of tax-free gain doubles to $500,000. Thus, homeowners no longer have to reinvest the sales proceeds by buying a more expensive home in order to "rollover" (that is, avoid paying tax on) the gain. Also, the new rules replace the one-time exclusion of $125,000 of gain that applied to people over age 55.

If you're like most people, your gain will be less than the $250,000/$500,000 limitations, and you will not owe any tax on the gain from the sale of a principal residence under the new rules. Plus, you avoid the hassle of trying to document costs, expenses and prices of various residences that homeowners experienced when selling a home under the old rules.

Like most tax laws, you must follow a detailed set of rules to qualify for the tax-break provision when you sell your home. As the seller, you must have owned and used the home as a principal residence for at least two of the last five years before the sale or exchange.

Typically, you can only take advantage of the provision once during a two-year period. However, a reduced tax break is available if the sale occurred because of a change in employment, health or other unforeseen circumstances.

The rule limiting the exclusion to one sale every two years does not prevent a married couple filing a joint return from excluding up to $250,000 of gain from the sale of either spouse's home if they could exclude the gain if filing separately.

For example, Sally, who is single, sells the home she has been living in for more than two years on May 15, 1998, and has a gain of $100,000 on the sale. The entire $100,000 of gain qualifies for the exclusion. On Sept. 1, 1998, Sally marries Harry. On Feb. 1, 1999, Harry sells the home he has been living in as a principal residence for more than two years and has a gain of $300,000.

Harry can only exclude $250,000 of the gain even if Harry and Sally file a joint return for 1999. The $500,000 exclusion doesn't apply because Sally sold a home within the two-year period ending on the date that Harry sold his home, and because Sally didn't use Harry's home as her principal residence for at least two of the five years before the sale.

Also, bear in mind that the rules can get pretty complicated if: The residence was part of a divorce settlement; You inherited the residence from your spouse; You sell a remainder interest in your home; or You have taken depreciation deductions on the residence.

Remember, too, that if you sell your home at a loss, you will not be able to claim a deduction. And if your profits exceed the $250,000/$500,000 limitations, you may have to pay more tax under the new law, since Congress repealed the provision allowing owners to defer gains by rolling over home-sale proceeds into a new home.

(Cary Jones is a CPA and senior manager with the Springfield office of Baird, Kurtz & Dobson, certified public accountants.)

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