Home Sweet Tax Shelter

by Broderick Perkins DeadlineNews.Com When it is time to pay your dues in Club America -- you know, income taxes -- your home offers financial shelter from what otherwise could be a taxing expense, especially when you sell your home. The Taxpayer Relief Act of 1997, credited with having a significant role in keeping the real estate sector ahead of the rest of the economy, is perhaps the best tax shelter your home provides -- perhaps the best tax shelter you'll ever enjoy. Generally, the federal tax law says when you sell your home, if you qualify, you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly, or $250,000 for single taxpayers, or married taxpayers who file separately. Under the law, to qualify for the $500,000/$250,000 exclusion, the home must have been your primary residence for at least two of the prior five years. The exclusion is not a one-time deal, but a benefit you can use again and again, theoretically every two years -- provided you qualify each time by meeting the owner-occupied-two-out-of-five-years requirement. If, for example, you have two homes and live in one for two years, sell it and then live in the other for the next two years and sell it, both sales qualify for the exclusion. Special provisions are available if, through some unforeseen event, you are forced to sell before you meet the two-year residency requirement. For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early. That means if you only live in your home a year (half the two-year requirement) before you are forced to sell, because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers. Specifically outlined unforeseen events include: • The "involuntary conversion" of your home, say, when the state government or other eminent domain order requires you to sell your house to make way for a new highway. • Natural or man-made disasters or acts of war or terror that damage the residence. • The death of the homeowner, a spouse, co-owner or other person whose principal place of residence is the house that was sold. • Health problems, if the primary reason for the sale is "to obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury" of the home owner, co-owner, spouse or other resident. • A loss of employment triggering eligibility for unemployment compensation. • A change in employment status that results in the owner's inability to pay housing costs and reasonable basic living expenses. • Divorce or legal separation. • Multiple births resulting from the same pregnancy. Selling Costs If, when you sell your home, after the exclusions, you realize a taxable gain, you can reduce your gain with selling costs. Your gain is your home's selling price, minus deductible closing costs, minus your basis. Your basis is the original purchase price, plus capital improvements, minus any depreciation. Real estate broker's commissions, title insurance, legal fees, administrative costs and inspection fees are all considered selling costs. Selling costs can also include items otherwise considered repairs -- painting, wallpapering, planting flowers, maintenance and the like -- provided you complete them within 90 days of your sale and provided they were completed to make the home more saleable. Moving Costs If a new job forces you to sell your home and move, you can deduct from taxable income some job-related moving costs. Your new job must be at least 50 miles from the old and you must work full time at the new work place for 39 of the 52 weeks following the move. Deductions include travel or transportation costs and expenses for lodging and storing your household goods. To be eligible for moving costs deductions if you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location. Check with your tax professional and state and local tax authorities to learn about home selling-related tax benefits. Copyright © 2005 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.