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Sale Of Residence – Tax Implications

Home For Sale

If a person owned and used a home as a principal residence for 2 of the 5 years preceding the sale, up to $250,000 of gain may be excluded ($500,000 on a joint return).

This tax break may be used only once every 2 years. A taxpayer who fails to meet the 2 year residency requirement because of a change in health, employment, or unforeseen circumstances may prorate the maximum exclusion by the percent of the 2 year requirement met.

This proration also applies for any person who had a residence on August 5, 1998 and sells it before August 5, 1999.

DON’T WRITE OFF YOUR HOME OFFICE IF YOU ARE SELLING YOUR HOME

If you expect to move in the near future, you can save money by passing up a current deduction on a home office – or by taking a smaller deduction than you’re entitled to.

Here’s why:

Under the new rules for home sales, you can exclude tax on the first $500,000 of gain ($250,000 for singles) if you use the home as your principal residence for at least 2 out of the previous 5 years. However, you forfeit part of the $500,000 exclusion if you take a home office deduction. To make matters worse, the portion of the gain allocated to the office-in-the-home is taxed at a maximum rate of 25%, instead of the usual rate of 20%, to the extent that you have claimed depreciation deductions for the home.

If you stop claiming the home office deductions for the 2 years before the sale, that will end your problem.

EXAMPLE: Years ago you bought a 10 room home for $200,000. Five years from now, you plan to retire and expect to get about $500,000 when you sell the house. The room you use for a home office represents 15% of the home’s total square footage.  If you continue to take home office deductions until you move, you will be taxed on 15% of your $300,000 gain (or $45,000). If you claimed $25,000 in depreciation deductions before the move, your total tax bill on the home sale is $10,250 ($20,000 x 20% + $25,000 x 25%). If you don’t take the home office deduction for the 2 years before the move, the entire $300,000 gain is tax-free.

There’s one other tax problem. Even if the home sale gain is completely tax-free, you must “recapture” depreciation deductions attributable to home business use after May 6, 1997.

If you are forced to move unexpectedly, amend your previous two years tax returns prior to the sale to pass up the home office deduction.


If you have any questions or require further info please call 718-531-1105 or send an email.


This web site and these articles are not tax or legal advice and are not intended as tax or legal advice.  They are intended to provide only general, non-specific legal information and are not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This web site and these articles are based on United States law.  You should consult with an accountant or lawyer familiar with the issues. This web site and the articles contained on this web site are not solicitations.

Contact Info:

Ronald Semaria
Semaria Consulting
1408 East 66th St
Brooklyn, NY 11234
Email: info@semaria.com

Phone Numbers:

Phone: 718-531-1105
Toll-Free: 866-531-1105
Toll-Free: 888-IRSAUDIT
Toll-Free: 888-RONTAXES
Fax: 718-444-7152

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