Taxpayers Guide to LLCs and S Corps
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Can I exclude the gain on my home sale?
First, you need to determine if your home is your main home. Houses, cooperative apartment and condominiums all count of course. But boats, trailers and mobile homes count too if they have cooking, sleeping and bathroom facilities. If you have multiple homes, you will need to consider your place of employment, the location of your family members, banks, clubs and religious organizations in addition to your mailing address (bills, tax returns, driver’s license, auto registrations, voter card).
Second, you need to determine the amount gained. The difference between the selling price and your adjusted cost basis will be your gain. What the heck is adjusted cost basis?
Your adjusted cost basis includes the purchase price, the costs associated with acquisition (title fees, legal fees, real estate commissions, etc.), any improvements and the costs associated with the sale. Lender fees, hazard insurance, rent for occupancy before closing and moving expenses are not included in your cost basis. Repairs are also not included in your cost basis. The difference between repairs and improvements can be tricky- improvements generally have a useful life of more than one year and add to the value of your home, prolong its useful life, or adapt it to new uses. For example, a new roof is an improvement but new paint is not.
Third, you have to meet the ownership and use tests. You cannot exclude the gain if you already excluded gain on a previous main home in the last two years. Also, in the previous 5 years (ending on the date of the sale), you must have-
Owned the home for at least 24 months (the ownership test), and
Lived in the home as your main home for at least 24 months (the use test).
The required 24 months of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they have to occur at the same time.
Exception: If you owned and lived in the property as your main home for less than 24 months (2 years), you can still claim an exclusion in cases of changes in employment, health or unforeseen circumstances. However, the maximum amount you may be able to exclude will be pro-rated.
Temporary Absence: Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use.
Other Exceptions: There are other exceptions for people with disabilities and members of uniformed services, intelligence offices and Peace Corps volunteers.
If you are a single taxpayer you can exclude $250,000. But if you are married you can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true-
You are married and file a joint return for the year
Either you or your spouse meets the ownership test
Both you and your spouse meet the use test.
So, run out and get married if you have more than $250,000 in gains. Just kidding.
This exclusion is not limited to domestic properties- if you own a main home in Australia and you are required to file a US tax return as a US citizen or resident alien, you are still allowed to take the exclusion.