Reduced Taxable Income Exclusion for Some Home Owners Who Sell Their Primary Residences
After 2008, some home sellers who don’t use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under the old rules. The tax break affected is the home sale exclusion. That break generally allows up to $250,000 of home sale profit to be tax-free if a home was owned and used by the seller as a principal residence (i.e., main home) for at least 2 of the 5 years before the sale. In general, the tax-free break can only be used once every 2 years. The tax-free profit amount is up to $500,000 for married taxpayers filing jointly for the year of sale if several conditions are met. A reduced maximum exclusion may apply to taxpayers who must sell their principal residence because of health or employment changes (or certain unforeseen circumstances) and as a result either fail the 2-out-of-5-year ownership and use rule, or previously used the home sale exclusion within two years.
For sales after 2008, the home sale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in. There are, however, a number of exceptions. For starters, pre-2009 periods of non-principal-residence use don’t count, and neither do periods of temporary absence totaling no more than 2 years due to health or employment changes (or certain unforeseen circumstances), or up to 10 years of absence for qualifying members of the military or certain government employees.
The new rules are quite complex and may cause some homeowners big headaches. Check out the fine print and talk to your tax advisor.
