This tax tip deals with the rules allowing taxpayers who are at least 55 years old to exclude gain on the sale of their homes.
The rule allows an exclusion of up to $125,000 of gain on the sale. There are several requirements.
- Age. You (or your spouse, as discussed below) must have reached age 55 no later than the day immediately before the date of sale. Reaching it during the year of sale but after the sale date doesn't qualify.
- Ownership and occupancy. You (or your spouse, as discussed below) must have owned and used the house as your "principal" residence for at least three out of the five years ending on the sale date. Accordingly, the exclusion isn't available on the sale of a second or vacation home.
- Married taxpayers. If you and your spouse jointly own the home, the exclusion is available if just one of you is at least 55 and meets the above use test as long as you file a joint return and neither has elected the exclusion for a previous sale (see below).
- Once in a lifetime election. The exclusion doesn't apply automatically: it must be elected. More importantly, once the election is made to exclude any amount of gain it can never be made again. This feature may make the decision of whether to make the election difficult. For example, say a taxpayer, age 55, is selling his home for a gain of $40,000 and plans to move into a rental unit. He can use the election to exclude the $40,000 of gain. However, if later in life he acquires another home which he sells for a larger gain, he won't be able to again elect; thus, the $85,000 exclusion remaining after the first sale ($125,000 - $40,000 used) is lost forever. Accordingly, in some cases, potential future plans must be included as a factor in the decision.
- For married taxpayers, if one spouse has previously elected (for example, before the marriage, or in an earlier marriage), then no election can be made, even if the other spouse has never elected.
The election is made on Form 2119 to be filed with your tax return for the year of sale. I would be happy to assist you in preparing it.
Buying a new home. If you buy a new home within two years you will be able to defer your gain on the sale of the old home except to the extent the new home costs less than the sales price of the old home. (These rules apply for taxpayers of all ages.) If this deferral rule covers your entire gain, there is no need to "use up" your exclusion election. On the other hand, to the extent you would have to recognize gain under the deferral rule, you can still use the exclusion election to exclude up to $125,000 of the gain. That is, the deferral and exclusion rules can both apply to the same sale.
- Example. Louis, age 55, sells his old home for $500,000, resulting in a gain of $200,000. He buys a new home for $325,000 within two years of the sale. Since the new home cost $175,000 less than the old home, he would have to recognize $175,000 of his $200,000 gain under the deferral rules. If he makes his exclusion election, however, he would exclude $125,000 of gain and would thus report only $50,000.
Please make an appointment for a consultation if you have further questions or would like additional information, particularly on the deferral rules if you're buying a new home.