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EXCLUSION OF GAIN ON THE SALE OF A PRINCIPAL RESIDENCE (2922)

The Taxpayer Relief Act of 1997 makes significant changes in the taxation of the sale of a principal residence. For married couples filing jointly, the Act provides an exemption of up to $500,000 of gain on the sale or exchange of a principal residence. A $250,000 exemption applies to all other taxpayers.

To qualify, you must have owned and used the property as your principal residence for at least two years during the five-year period ending on the date of the sale or exchange. You may use the new rule any number of times, but generally not more frequently than once every two years.

If you fail to meet the occupancy requirement because of a change in employment location, health or other unforeseen circumstances, a portion of the maximum exclusion may be allowed based on your actual period of occupancy.

Married couples filing jointly can take the $500,000 exclusion if all three of the following requirements are met: (1) either spouse meets the ownership requirement, (2) both spouses meet the use requirement, and (3) neither spouse has had a sale of their principal residence in the preceding two years subject to the exclusion.

If you marry someone who has used the exclusion within the two years prior to your marriage, you will still be allowed a $250,000 exclusion. And when both spouses satisfy the eligibility requirement and two years have passed since the last exclusion was allowed to either spouse, a full $500,000 exclusion will be allowed in the next sale or exchange of their principal residence.

The Act repeals the former Internal Revenue Code section 1034 "rollover" of gain from the sale of a principal residence and the Internal Revenue Code section 121 one-time $125,000 exclusion of gain for a person 55 years of age and older selling their principal residence.

However, even if you have previously taken the one-time $125,000 exclusion, you can still be eligible for the new $250,000 or $500,000 exclusions from gain under the Act.

Unfortunately, a loss from the sale of a principal residence is still not deductible because it is deemed to be a personal loss.

Please check with your tax advisor to see if this information fits your situation.