The last thing you might be thinking about when you’re selling your home is tax. Especially in this market. After all, you may ask, don’t we all get a capital gains exclusion when you sell your house? And you’re just grateful to be making some money on the sale of your principal residence.
Unfortunately, that’s one of the new tax law changes that we got in 2009. In the past, if you lived in your home for 2 of the previous 5 years, you were able to take a capital gains tax exclusion of up to $500,000 for married filing jointly or $250,000 if you’re single.
That all changed in 2009. If you’ve always lived in your home, you’re still going to get the deduction. But if there was any time when you didn’t live in your home, say it was a vacation home or a rental, then you might have to pro-rate the gain.
The rule isn’t easy to follow either. If you’d moved into the house prior to 1/1/09, you get the old law grandfathered in. If you moved in after 1/1/09, you have to prorate.
The first definition to learn under the new law is ‘qualifying use’ versus ‘non-qualifying’ use.
Qualifying Use vs. Non-Qualifying Use
Qualifying use means you or your spouse is using the home as a primary residence.
Non-qualifying use means neither you or your spouse is using the house as a primary residence.
If you’ve always had use as your primary residence, you don’t need to allocate the gain.
If you have non-qualifying use, you probably will need to allocate the gain. The portion of capital gains that can not be excluded is determined based on the following ratio:
Period of non-qualifying use
Period of ownership
Two Exceptions to Non-qualifying Use
There are two exceptions to non-qualifying use for your property.
If the property is your principal residence prior to January 1, 2009, and you otherwise qualify for capital gain exclusion, you don’t need to allocate.
Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. If you had to leave the property due to employment, health conditions, or other unforeseen circumstances, and you don’t claim another principal residence, then you don’t need to count the time you were gone as non-qualifying use.
Real estate tax laws have gotten very complicated lately. Make sure your CPA is up on the latest changes.