Although we do not have the time to respond to all of the hundreds of remarks
left in the comments section of this site, we do read each and every comment.
That section, incidentally, is becoming a very vibrant blog
with information being exchanged among readers and help given; it is a lot of
fun to read. However, we recently noted several specific questions
about the Internal Revenue Service's interpretation of the capital gains
exclusion of profits on the sale of a personal residence. With April 17 approaching
fast (April 15 falls on a non-business day) we would like to point those readers
with questions about this beneficial tax wrinkle toward some free help.
The home seller's tax exclusion, which became effective in 1997, allows homeowners
to exclude $250,000 in capital gains ($500,000 for a married couple) from the
sale of a personal residence they have occupied for two years out of the previous
five years. This has been a boon for homeowners who have, in many cities, seen
the value of their homes increase by double digits in the last few years. If
all tests are met, they do not need to pay taxes on this profit when the house
It is the tests that can trip people up. Nearly all IRS regulations need interpretation,
they do tend to be written in a totally foreign language, and this is done through
rulings done by IRS itself, through case law, or sometimes both. The IRS has
issued many interpretations of and caveats about this home seller exclusion
and taxpayers are, sometimes confused.
The questions on our site had to do with situations such as long-term military
deployment or a combination of renting and owning while occupying the property
during the relevant period of time. Another frequent source of concern is how
the IRS will view and handle individual cases when an early sale is forced by
circumstances more or less beyond the control of the home seller.
While the standard answer is always "consult your tax expert" there is an excellent
source of information on the IRS website; www.irs.gov.
If you have not discovered this site, it may truly represent an occasion when
the old punch line "I am from the government and I am here to help" is actually
true. The site is heaven-sent for procrastinators who discover at the last minute
that they are missing an obscure but necessary form or are absolutely clueless
about the Alternative Minimum Tax. (As an aside, be very sure you access the
genuine federal website. Typing in .com rather than gov will transport you to
a site that charges for forms and other services.)
Anyway, as regards the home seller exclusion, the IRS has
provided an excellent on-line publication to answer questions such as we noted
above. Publication 523 is easily accessed from the IRS homepage and pretty clearly
(incredibly clearly considering the source) explains how the exclusion works.
It defines principal residence, explains how to calculate a gain on sale, and
gives excellent and concrete examples for many of the common questions that
arise when a sale does not precisely fit the mold. For example, these two scenarios
dealing with military deployment probably cover most of the situations an affected
taxpayer might incur.
David bought and moved into a home in 1997. He lived in it as his main
home for 2.5 years. For the next 6 years, he did not live in it because he was
on qualified official extended duty with the Army. He then sold the home at
a gain in 2005. To meet the use test, David chooses to suspend the 5-year test
period for the 6 years he was on qualifying official extended duty. This means
he can disregard those 6 years. Therefore, David's 5-year test period consists
of the 5 years before he went on qualifying official extended duty. He meets
the ownership and use tests because he owned and lived in the home for 2.5 years
during this test period.
Period of suspension. The period of suspension cannot last more than 10 years.
Together, the 10-year suspension period and the 5-year test period can be as
long as, but no more, than 15 years. You cannot suspend the 5-year period for
more than one property at a time. You can revoke your choice to suspend the
5-year period at any time.
Mary bought a home on April 1, 1989. She used it as her main home until
September 1, 1992, when she went on qualified official extended duty with the
Navy. She did not live in the house again before selling it on August 1, 2005.
Mary elects to use the entire 10-year suspension period. Therefore, the suspension
period would extend back from August 1, 2005, to August 1, 1995, and the 5-year
test period would extend back to August 1, 1990. During that period, Mary owned
the house all 5 years and lived in it as her main home from August 1, 1990,
until September 1, 1992, a period of 25 months. She meets the ownership and
use tests because she owned and lived in the home for 2 years during this test
OK, not exactly written by the Children's Television Workshop, but still, after
a few read-throughs it is pretty clear. There are dozens of these examples dealing
with the home tax selling exclusion and, if you have questions about other aspects
of your return there is probably a publication (there are, after all, at least
523 of them) that will explain and give concrete examples to help you out. You
can instantly download and print all publications and any needed forms.
Even if you didn't sell a house in 2005 this site could save your life
at 10:30 p.m. a week from Monday if only to allow you to print and file Form
4868, Application for Automatic Extension of Time to File Individual Income