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HOW DO YOU EXCLUDE $500,000 IN GAIN ON THE SALE OF A HOUSE?

August 28, 2002

To paraphrase Steve Martin, first you get your house to go up in value by $500,000. Then you have to meet a few other simple requirements:

-The house has to be owned and used as your principal residence for at least 2 of the previous 5 years.

-You cannot have excluded gain from the sale of another principal residence in the prior two years.

The maximum exclusion is $500,000 for married taxpayers filing a joint return and $250,000 for single taxpayers.

Under normal circumstances the 2-year rules are all-or-nothing. If you closed your sale 23 ½ months after you moved in, you could not exclude any of the gain; two weeks later you could exclude it all (up to the $500,000/$250,000 limit). Relief from this strict rule is available if the sale is due to certain unforeseeable circumstances – a health crisis, or a job change, for example. If the relief provision applies, $500,000/$250,000 amounts are pro-rated; a joint return could exclude up to $250,000 for a house owned and lived in for 12 months. The IRS last week (Notice 2002-60) said moves resulting from the death of a spouse, a man-made disaster, or an act of war also qualify for this relief. Sales caused by the September 11 attacks are specifically covered.

The law no longer requires taxpayers to “roll” their home sale proceeds into a new house. There is no minimum age requirement for the exclusion.

DID YOU KNOW?

Taxpayers with jobs training agreements with Iowa community colleges can qualify for valuable state income tax benefits? We have added the Des Moines Area Community College jobs training program to our links page.

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