What You Need to Know About the New Tax Law
Here’s an overview of the new tax exclusion rules for the sale of a principal residence.
October 1, 1997
Buyers and sellers are asking questions about the tax implications of buying or selling a house as a result of the new federal tax law that was signed on Aug. 5.
Below are some questions and answers on the new law prepared by the NATIONAL ASSOCIATION OF REALTORS® Government Affairs. Real estate professionals can use these answers to help educate clients and customers about tax changes.
The information focuses on the new tax exclusion on the sale of a principal residence--$500,000 for married couples filing jointly and $250,000 for singles. This new exclusion replaces and expands the old $125,000 one-time exclusion allowed for taxpayers age 55 or older. Taxpayers selling their house can claim the new exclusion as often as once every two years. They no longer have to buy another house of equal or greater value to claim the exclusion.
Taxpayers must satisfy three tests to qualify for the new exclusion.
I bought my house in 1990 and I plan to sell it soon. How do I determine my basis for measuring gain when I sell?
The starting point is your purchase price for the residence you bought in 1990. From that you must subtract any gain that you realized and deferred from earlier transactions. If you did do a rollover, you should review the Form 2119, “Sale of Your Home,” that you filed with your tax return for the year you sold your earlier residence. That form will show the adjusted basis of your current residence after rollover of the earlier gain.
Whether you start with the actual purchase price or an adjusted basis as determined in a prior rollover transaction, your basis is increased by adding the cost of major improvements or special tax assessments and subtracting any depreciation (e.g., which you might have taken as a prior home office deduction). The instructions for Form 2119 include a detailed work sheet to help you determine your correct basis.
I sold my house on Sept. 1, 1997, and qualified for the $500,000 exclusion. On Sept. 2, 1997, I bought a new house for $150,000. I plan to sell it as soon as I again qualify for the exclusion. How do I determine my basis for measuring gain when I sell?
Your basis will simply be the purchase price of the $150,000 home plus improvements. The fact that you claim the $500,000 exclusion does not affect the basis of any residence you later purchase.
My spouse and I purchased a residence more than five years ago, lived in it for a while, then converted it to a rental property. If we sell this property today, we’ll have used it as our principal residence for fewer than two of the past five years. Can we still claim a portion of the exclusion?
No. If you fail any of the tests, you do not qualify for any portion of the exclusion, except under special circumstances involving employment or health.
How Do I Qualify for the $250,000/$500,000 Exclusion?
You must satisfy three tests:
- Ownership test--You must have owned the residence for at least two years of the five years preceding the date of sale.
- Use test--You must have used the property as your principal residence for two of the five years preceding the sale. Special note: If the residence you’re selling was acquired in a rollover transaction, you may be allowed to include the period of time you owned and used your former principal residence(s) for purposes of the ownership and use tests. You should consult your tax adviser to determine whether you qualify.
- Waiting-period test--You must not have used this exclusion for any sale during the preceding two-year period.
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Updated: February 21, 2020