YOU may exclude from gross income gain from sale of principal residence under Internal Revenue Code Section 121.
1. You may be able to exclude gain of $250,000 or $500,000 if you are married filing a joint return.
2. To be eligible for the bigger $500,000 exclusion for joint filers, must meet the three requirement: (a) at least one spouse must pass the ownership test; (b) both spouses must pass the use test; (c) during the two-year period ending on sale, neither spouses excluded gain from sale of another home. You can avail of this exclusion once every two years.
3. Ownership and use test: You must meet the five-year period ending on the date of sale. You must have : (a) Owned the your principal residence for at least two years, and (b) lived in your principal residence as your main home for at least two years.
4. Only a principal residence used as main home is eligible. Second homes and vacation homes are not.
5. Exclusion determined on individual basis: If one spouse is eligible for the exclusion and the other spouse have used the exclusion during the two-year period ending on sale, the eligible spouse is entitled to a maximum exclusion of $250,000.
6. If you use two homes, the property that you use majority of the time will be considered your principal home. There are relevant factors to determine which one is your principal residence, including: your place of employment and principal place of abode of family members, address on your income tax, driver’s license, DMV auto registration, mailing address for bills and correspondence, and location of banks, church, and recreational clubs.
7. Gain attributable to nonqualified use: Any use other than as your principal residence is nonqualified use. This includes vacation home, renting it out, vacancy, and allowing someone’s living in it. The allocation of the gain for the nonqualified use is the amount of the gain multiplied by the fraction of aggregate periods of nonqualified use during the period of ownership divide by the total period of ownership.
8. Nonqualified use do not include: temporary absence by reason of (a) change of job location, (b)Health considerations, and (c) unforeseen circumstances includes foreclosure or voluntary conveyance.
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Disclaimer: Any accounting, business or tax advice contained in this communication is neither intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
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Al-os & Associates Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.