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...continued from Tax Exemptions are Abounding in Home Ownership

Like many lucky men, Andy found a complementary woman, fell in love, married and chose to move into a bigger house. And he has found big benefits. Because Andy had lived in his property for two of the last five years, Internal Revenue Code 121 allowed him to exclude up to $250,000 in home-sale profits from taxable income on his 2003 tax returns.

If he had married and the missus had lived there before selling the property, they would have been able to take the married couples’ exemption at up to $500,000. (Profits in excess of the excluded amounts are taxed as capital gains.)

Another nice thing about IRC 121 is that the method of holding title is not important. For a married couple to claim up to $500,000 tax free, only one spouse’s name needs to be on the principal residence title — providing both meet the occupancy test. If the title is held in a living trust, new IRS regulations clearly state that the full tax exemption is still available.

The new and improved tax code also offers partial exclusions to home sellers who don’t meet the minimum two-year residency requirement. Under the old rules, taxpayers could get a partial exclusion when a move was required by a change of employment, health reasons or “unforeseen circumstances.” Last fall, the IRS clearly defined “unforeseen circumstances” as:

Divorce or legal separation. Couples who split also can share the $500,000 tax benefit, provided at least one lived in the house for two of the last five years before the home’s sale.

Death of a spouse. The Internal Revenue Code states that a surviving spouse can claim the $500,000 benefit if they sell the home in the tax year of the spouse’s death. However, if the home is sold after the year of the death, the exemption reverts to $250,000.

“This rule doesn’t force surviving spouses to sell their homes promptly to claim the $500,000 tax exemption because they usually receive a new ‘stepped-up basis’ for the home as of the date of the spouse’s death,” said national real estate columnist Bob Bruss.

In a community property state like California, the surviving spouse’s new basis is usually 100 percent of market value on the date of death. Thus, little or no tax is due if the home is sold a few years after the first spouse’s death.

A change in employment that makes it impossible to pay the mortgage or basic living expenses. This includes becoming eligible for unemployment compensation.

A move can be justified for health reasons if a physician recommended it for the
physical betterment of the homeowner, the owner’s spouse or for certain close relatives.

Multiple births resulting from the same pregnancy.

Damage to the home from a natural disaster, an act of war or terrorism.

Condemnation, seizure or involuntary conversion of the property, such as through
foreclosure.

The size of the deduction depends on the length of time the seller lived in the house
during the five years prior to the sale. Partial exemptions are available based on the percentage of the 24-month occupancy time.

For more information, consult a tax advisor.

For your real estate needs, e-mail Like many lucky men, Andy found a complementary woman, fell in love, married and chose to move into a bigger house. And he has found big benefits. Because Andy had lived in his property for two of the last five years, Internal Revenue Code 121 allowed him to exclude up to $250,000 in home-sale profits from taxable income on his 2003 tax returns.

If he had married and the missus had lived there before selling the property, they would have been able to take the married couples’ exemption at up to $500,000. (Profits in excess of the excluded amounts are taxed as capital gains.)

Another nice thing about IRC 121 is that the method of holding title is not important. For a married couple to claim up to $500,000 tax free, only one spouse’s name needs to be on the principal residence title — providing both meet the occupancy test. If the title is held in a living trust, new IRS regulations clearly state that the full tax exemption is still available.

The new and improved tax code also offers partial exclusions to home sellers who don’t meet the minimum two-year residency requirement. Under the old rules, taxpayers could get a partial exclusion when a move was required by a change of employment, health reasons or “unforeseen circumstances.” Last fall, the IRS clearly defined “unforeseen circumstances” as:

¦ Divorce or legal separation. Couples who split also can share the $500,000 tax benefit, provided at least one lived in the house for two of the last five years before the home’s sale.

¦ Death of a spouse. The Internal Revenue Code states that a surviving spouse can claim the $500,000 benefit if they sell the home in the tax year of the spouse’s death. However, if the home is sold after the year of the death, the exemption reverts to $250,000.

“This rule doesn’t force surviving spouses to sell their homes promptly to claim the $500,000 tax exemption because they usually receive a new ‘stepped-up basis’ for the home as of the date of the spouse’s death,” said national real estate columnist Bob Bruss.

In a community property state like California, the surviving spouse’s new basis is usually 100 percent of market value on the date of death. Thus, little or no tax is due if the home is sold a few years after the first spouse’s death.

¦A change in employment that makes it impossible to pay the mortgage or basic living expenses. This includes becoming eligible for unemployment compensation.

¦A move can be justified for health reasons if a physician recommended it for the
physical betterment of the homeowner, the owner’s spouse or for certain close relatives.
¦ Multiple births resulting from the same pregnancy.

¦ Damage to the home from a natural disaster, an act of war or terrorism.

¦ Condemnation, seizure or involuntary conversion of the property, such as through
foreclosure.

The size of the deduction depends on the length of time the seller lived in the house
during the five years prior to the sale. Partial exemptions are available based on the percentage of the 24-month occupancy time.

For more information, consult a tax advisor.

For your real estate needs, e-mail Jodi Summers at at jodis@verizon.net,
or call 310-260-8269.