Can you use IRS section 121? - Posted by Dave Swett-CA
Posted by Dave Swett-CA on July 23, 2003 at 11:44:47:
I copied Robt Bruss’ column on the IRS code 121 which allows no pmt of cap gain tax on the sale of your personal residence. If you qualify and affect a quick sale of your personal residence, you will have a bucket of cash to work with for your future deals.
The only problem with being cash rich is that you stand the risk of paying too much for your deals. When you are lean and hungry, you negotiate better and have a higher standard of what the deal must give you in terms of cash flow and appreciation.
This being the end of July, you do have to make your life style decision quickly to get the most money from your home. 70% of all SFR home sales are made from Easter to Labor Day–why, cuz of the kiddies coming and going to school. So if you miss the important Labor Day cut off, you give up the advantage of having the seller’s market on your side and it will be tougher to sell your home for a max price.
Here is Robt Bruss’ script:
IRS Code 121 - Tax Free Profits From the Sale of Your Residence
Surprisingly, many homeowners still aren’t aware of the new generous tax exemptions available to home sellers since 1997. Gone are the old tax rules, such as a meager $125,000 tax exemption, which was also called the “over 55-rule,” and the requirement that home sellers buy a replacement residence to avoid payment profit tax. Today’s tax breaks for sellers are much simpler and easier to understand.
The simple qualification rule
To quality for Internal Revenue Code 121’s generous home sale tax exemption, the seller of a principal residence must have owned and occupied it an “aggregate” of two of the past five years before its sale. If you can’t meet this two-year occupancy test because of a disability that forced you to live in a medical facility or nursing home, you can still qualify for the exemption if you lived in your “main home” at least 12 months.
Once qualified, a principal residence seller can claim up to $250,000 of tax-free sales profits. Husband and wife who both qualify can claim up to $500,000 of tax-free profits if they file a joint tax return, and only one spouse needs to hold the title to qualify. Holding title in a living trust will also qualify. Uncle Sam doesn’t even require reporting exempt home sales on your tax returns.
This generous tax exemption includes deferred profits from previous principal residence sales under the now-repealed “rollover residence replacement rule” of Internal Revenue Code 1034.
What is a principal residence?
The IRS defines the taxpayer’s principal residence as a “main home.” That means it is the taxpayer’s address for activities such as voting, filing income tax returns, working and having a driver’s and/or business license. It is also where the taxpayer spends the most time, except for temporary absences, such as for business trips and vacations.
When partial exemptions are allowed
Many homeowners find they must sell their principal residences after less than the required two year minimum ownership and occupancy. If the reason for the sale is a job location change, which qualifies for the moving expense deduction, or if the move is because of a health problem, then a partial exclusion is available.
IRS Publication 523 contains worksheets for calculating partial exclusions caused by short-term residency. The $250,000/$500,000 exclusion is reduced by the number of days the residence was not owned and occupied by the seller.
A new tax-free career
There is no limit to the number of times this $250,000/$500,000 home-sale tax exemption cam be used. However, it cannot be used more frequently than once every 24 months, except as explained above.
For example, a couple can buy a fixer-upper house, add profitable improvements to increase its market value, and sell it for up to $500,000 tax-free profits after as little as two years of ownership and occupancy. Then, they can do it all over again with another “fixer” principal residence, selling it after 24 months and paying no tax on the profits up to $500,000.
Vacation home eligibility
If you occupy a second or vacation home a month or two each year, it clearly cannot qualify for this tax exemption because it hasn’t been your principal residence for an “aggregate” of two years during the five years before sale.
However, suppose Barbara and George live in their Houston home from November through April each year. They live in their Maine summer home from May through October each year. If they sell either home, it can easily meet the “main home” requirements because they have owned and occupied each for an “aggregate” of at least 24 months within the 60 months before sale. While living in it, the residence is their full-time “main home.” Therefore, they can claim up to $500,000 tax-free home sale profits on either home.
Where to report high profits
Many sellers have profits above the $250,000/$500,000 exclusions. In 1998, the IRS eliminated its Form 2119 for reporting principal residence sales. Taxpayers should now use Schedule D to report their home-sale capital gains exceeding these exemptions. Principal residence sales that are completely tax free need not be reported on your federal tax returns. For further details on this generous tax break, consult your tax adviser.
By Robert J. Bruss
Reprinted from the Sarasota Herald Tribune 1/16/00