Excluding the Sale of Main Home From Seller’s Income
From My Point of View:
Excluding the Sale of Main Home From Seller’s Income
By Dan E. Nino, CTEC/CRTP
For many years that I’ve been preparing income taxes, aside from sales tax and tax filing for non-profit organizations, I found out that I learn something every day. Every tax return is different from each other. The circumstances, the status of tax filers, their gross income, adjusted gross income, tax deductibility, tax exclusions, dependents, etc. are taken into account.
But one aspect of the taxation that I found very interesting is the sale of a main home by divorcing owners. As well all know, divorce is a contentious matter. But I was able to assist my client’s tax return to her satisfaction into a win-win situation.
There are also times that I serve as personal counselor because they tell me their personal problems. I can’t just ignore their sob stories because I don’t want to appear rude and dismissive.
Anyway, according to federal tax laws, a taxpayer may qualify to exclude from their income all or part of any gain from the sale of their main home. A main home is the one in which the taxpayers live most of the time.
I found out that closing costs or expenses in selling a main home are example of exclusions or items that are not required to be included as gross income.
Fifty percent of the net proceeds directly associated from the sale of a main home should be given each to the divorcing couple. Expenses incurred in the sale of the main house should be equally divided by the sellers or divorcing couples as exclusions when one files his/her income tax return like real estate agent’s commissions, legal fees, escrow charges, County Transfer Tax, Escrow Fees, Document fees, Loan Payoff, Notary Fees, miscellaneous payoff charges, and other costs or fees paid in order to sell the home.
For the federal side, just fill out the Sale of a Main Home Worksheet in the Schedule D, Other Menu to see if any of the capital gain from the sale of their main home can be excluded.
Generally, if a taxpayer meets the following tests, they can exclude up to $250,000 if filing single or ($500,000 if married and filing a joint return) of the gain from the sale of a main home.
The taxpayer must have owned and lived in the home for at least 2 out of the last 5 years leading up to the sale of the home and must satisfy the ownership test and residence test.
The required two years of ownership and residency during the five-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. A taxpayer meets the tests if they can show that they owned and lived in the property as their main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale.
Here are the frequently asked questions as proffered by the IRS in determining if a taxpayer qualifies to exclude all or part of the gain from the sale of their main home. Refer to IRS Publication 523, the section entitled “Does Your Home Sale Qualify for the Exclusion of Gain?
The sale of a main home must be reported on the taxpayer’s federal income tax return if any of the following apply:
- There is a taxable gain on the sale of the home
- The taxpayer elects to report a gain that is eligible for the exclusion
- Reporting a Loss: A loss from the sale of the taxpayer’s main home can not be deducted from income on the tax return.
More Than One Home: If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
Example One: You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.
Example Two: You own a house, but you live in another house that you rent. The rented house is your main home.
I hope these tax tips can be helpful next time you prepare your income tax – especially for those divorcing couples. – denino1951@gmail.com