Many of us find ourselves selling our homes and in these times of huge changes in property values in California, we may need to look at the tax affects of this.
For years prior to 1997, taxpayers had to reinvest the proceeds in order to avoid paying taxes on this gain. With the passage of the Taxpayer Relief Act of 1997, Congress passed a law to simplify this very common act.
This 1997 law now allows us to exclude $250,000 of gain from the sale if you are single, or $500,000 if you are married filing a joint return. The only requirement is that you would have to live in this home as your principal residence for 2 out of 5 years prior to sale. This is not a one time thing. You can do this every 2 years. Taxpayers are able to exclude gains from the sale of rental properties by properly using this 2 year planning tool.
Sale of residence due to divorce causes many issues. If one spouse moves out for more than three years and house does not get sold for another two years, it is important that you and your spouse have a written agreement or court order granting the spouse remaining in the home exclusive use of the residence, to preserve both taxpayers the ability to fulfill the residency requirement and therefore each could exclude up to $250,000.
There are exceptions to the 2 year rule. This means that under certain circumstances you can still exclude at least part of the gain if you meet the exception rules. One rule is the need to sell your home before the two year mark if your employer requires you to move, another reason would be for health reasons, or any unforeseen circumstances.
In case you are lucky enough to have a gain higher than your exclusion, the federal tax rate on the this gain has been reduced to 15%.
Always talk to your tax advisor before selling any of your large assets.