Property Tansactions

Posted on August 4, 2024

PROPERTY TRANSACTIONS - TAXABLE DISPOSITIONS

For certain type of transactions, gain may be realized but not recognized.

Amount realized- NBV=Gain (if positive)--> Pay Tax

Amount realized-NBV=Loss (if negative)--> May be deductible

Gains are not taxable (not recognized) if the amount realized is excluded or deferred. We will discuss one such instance in this section.

HOMEOWNER'S EXCLUSION (Section 121)

The gain on the sale of a taxpayer's principal residence may be eligible for an exclusion from gross income :

• $500,000 exclusion is available to married filing jointly taxpayer and certain surviving spouses
• $250,000 exclusion is available for single, married filing separately and head of household taxpayers
• If personal residence is sold at a loss, it is not deductible since it is counted as a personal loss

HOW TO QUALIFY FOR THE FULL HOMEOWNER'S EXCLUSION

• The property should be owned and used by the taxpayer as a principal residence
• The property should have been used for two or more years during the five year period ending on the date of sale or exchange
• The period of ownership and use does not have to be continuous
• The gain eligible for exclusion may be reduced because of non-qualified use, such as renting the property rather than using the property
• In a joint return, the ownership requirement can be met by either spouse
• However, both spouses must meet the use requirement in order to use the full MFJ (married filing jointly)exclusion of $500,000
• If both spouses do not meet the use requirement, one spouse may still be eligible to take the single $250,000 exclusion
• There is no age requirement to receive the exclusion
• There is no requirement that the taxpayers purchase another personal residence
• If the house is owned and used by a couple and one of the spouses passes away, the surviving spouse is still entitled to the full $500,000 exclusion if the surviving spouse sells the house within two years
• The taxpayers may use the homeowner's exclusion as often as available over his or her lifetime provided he or she meets the other requirements but the exclusion may not be used more than once every two years

HOME SALE EXCLUSION EXCEPTIONS

There are several exceptions to the IRS home sale exclusion rules.

For example, if you are transferring a home to a spouse or ex-spouse the IRS doesn't consider that to be a gain or a loss. Other exceptions to the rule apply in situations involving U.S. military service members as well.

PARTIAL HOME EXCLUSION

If you don't meet the eligibility test for the maximum home sale exclusion, you may still qualify for a partial exclusion of gain. For example, according to the IRS, you can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue or an unforseeable event. There are also certain factors, such as any depreciation claimed for the home, which may affect the capital gains tax.

Summarizing in simple terms, the capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married filing jointly) of capital gains from the sale of their primary residence. This means that on a gain on sale of your home for less than $250,000 (or $500,000 for MFJ) you will not be obligated to pay capital gains tax on that amount.