March 4, 2014
by Matthew B. Theunick
Trott & Trott, P.C. – USFN Member (Michigan)
IRS provision 26 U.S.C. § 121 discusses the issue of exclusion of gain from the sale of a principal residence. Specifically, the section states that, “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”
For the tax practitioner or layman, IRS Publication 523 tracks and clarifies 26 U.S.C. § 121 with respect to “Selling Your Home” for use in preparing 2013 tax returns. As Publication 523 notes, “If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases).”
To qualify for this maximum exclusion of up to $250,000 for a single filer and $500,000 for a joint filer, it is necessary that this exclusion is on a “main home.” Typically, one’s main home would include the home lived in most of the time, whether this is a house, houseboat, mobile home, cooperative apartment, or condominium. Factors relevant in determining which home is one’s main home include: (1) your place of employment; (2) the location of your family members’ main home; (3) your mailing address for bills and correspondence; (4) the address listed on your: (a) federal and state tax returns; (b) driver’s license; (c) car registration; and (d) voter registration card; (5) the location of the bank you use; and/or (6) the location of recreational clubs and religious organizations in which you are a member.
Having met the “main home” requirement, it is then necessary to meet an (1) ownership test and (2) use test during the prescribed period of time, as indicated in the statute. This means that during the 5-year period ending on the date of the sale, one must have:
Owned the home for at least two years (the ownership test), and
- Lived in the home as your main home for at least two years (the use test).
The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. For example, 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 x 2) during the five-year period ending on the date of sale.
Generally speaking, if you can exclude all the gain, you do not need to report it on your tax return. However, if you have a gain that cannot be excluded, you generally must report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses.
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