Excluding gain on sale
Maximum Exclusion
You can exclude up to $250,000 of the gain on the sale of your main home if
all of the following are true.
· You meet the ownership test.
· You meet the use test.
· During the 2-year period ending on the date of the sale, you did
not exclude gain from the sale of another home.
If you and another person owned the home jointly but file separate returns,
each of you can exclude up to $250,000 of gain from the sale of your
interest in the home if each of you meets the three conditions just listed.
You may be able to exclude up to $500,000 of the gain on the sale of your
main home if you are married and file a joint return and meet the
requirements listed in the discussion of the special rules for joint
returns, later, under
<http://www.irs.gov/publications/p523/ar02.html#en_US_2010_publink1000200739
> Married Persons .
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This
means that during the 5-year period ending on the date of the sale, you must
have:
· Owned the home for at least 2 years (the ownership test), and
· Lived in the home as your main home for at least 2 years (the use
test).
Exception. If you owned and lived in the property as your main home for
less than 2 years, you can still claim an exclusion in some cases. However,
the maximum amount you may be able to exclude will be reduced. See
<http://www.irs.gov/publications/p523/ar02.html#en_US_2010_publink1000200747
> Reduced Maximum Exclusion , later.
Example 1-home owned and occupied for at least 2 years.
Amanda bought and moved into her main home in September 2007. She sold the
home at a gain on September 15, 2010. During the 5-year period ending on the
date of sale (September 16, 2005-September 15, 2010), she owned and lived in
the home for more than 2 years. She meets the ownership and use tests.
Example 2-ownership test met but use test not met.
Dan bought a home in 2005. After living in it for 6 months, he moved out. He
never lived in the home again and sold it at a gain on June 28, 2010. He
owned the home during the entire 5-year period ending on the date of sale
(June 29, 2005-June 28, 2010). However, he did not live in it for the
required 2 years. He meets the ownership test but not the use test. He
cannot exclude any part of his gain on the sale unless he qualified for a
reduced maximum exclusion
<http://www.irs.gov/publications/p523/ar02.html#en_US_2010_publink1000200747
> (explained later).
Period of Ownership and Use
The required 2 years of ownership and use during the 5-year period ending on
the date of the sale do not have to be continuous nor do they have to occur
at the same time.
You meet the tests if you can show that you owned and lived in the property
as your main home for either 24 full months or 730 days (365 × 2) during the
5-year period ending on the date of sale.
Example.
Susan bought and moved into a house in July 2006. She lived there for 13
months and then moved in with a friend. She moved back into her own house in
2009 and lived there for 12 months until she sold it in July 2010. Susan
meets the ownership and use tests because, during the 5-year period ending
on the date of sale, she owned the house for more than 2 years and lived in
it for a total of 25 (13 + 12) months.
Temporary absence. Short temporary absences for vacations or other
seasonal absences, even if you rent out the property during the absences,
are counted as periods of use. The following examples assume that the
reduced maximum exclusion (discussed later) does not apply to the sales.
Example 1.
David Johnson, who is single, bought and moved into his home on February 1,
2008. Each year during 2008 and 2009, David left his home for a 2-month
summer vacation. David sold the house on March 1, 2010. Although the total
time David lived in his home is less than 2 years (21 months), he may
exclude any gain up to $250,000. The 2-month vacations are short temporary
absences and are counted as periods of use in determining whether David used
the home for the required 2 years.
Example 2.
Professor Paul Beard, who is single, bought and moved into a house on August
28, 2007. He lived in it as his main home continuously until January 5,
2009, when he went abroad for a 1-year sabbatical leave. On February 6,
2010, 1 month after returning from his leave, Paul sold the house at a gain.
Because his leave was not a short temporary absence, he cannot include the
period of leave to meet the 2-year use test. He cannot exclude any part of
his gain because he did not use the residence for the required 2 years.
Ownership and use tests met at different times. You can meet the ownership
and use tests during different 2-year periods. However, you must meet both
tests during the 5-year period ending on the date of the sale.
Example.
In 2000, Helen Jones lived in a rented apartment. The apartment building was
later converted to condominiums, and she bought her same apartment on
December 3, 2007. In 2008, Helen became ill and on April 14 of that year she
moved to her daughter's home. On July 12, 2010, while still living in her
daughter's home, she sold her condominium.
Helen can exclude gain on the sale of her condominium because she met the
ownership and use tests during the 5-year period from July 13, 2005, to July
12, 2010, the date she sold the condominium. She owned her condominium from
December 3, 2007, to July 12, 2010 (more than 2 years). She lived in the
property from July 13, 2005 (the beginning of the 5-year period), to April
14, 2008 (more than 2 years).
The time Helen lived in her daughter's home during the 5-year period can be
counted toward her period of ownership, and the time she lived in her rented
apartment during the 5-year period can be counted toward her period of use.
-sunil
SUNIL SETHI REAL ESTATE
Sunil Sethi / Broker, President, REALTOR, MBA, CPA (inactive)
38750 Paseo Padre Pkwy Suite B3 / Fremont, CA 94536
Cell 510 388 2436 / Fax 510 431 9046
<http://www.sunilsethi.com/> www.sunilsethi.com
CA DRE#: 01173766
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