Tax break available to homeowners who have to sell
By Sandra Block
USA Today
Most home buyers expect to stay in their homes for a long time. But sometimes, unexpected circumstances intrude. You lose your job. Your spouse runs off with the dog walker. Your new neighbors own 11 cars, and 10 of them are up on blocks.
Richard Ambo • The Honolulu Advertiser
Well, cheer up. If you have to sell your home, you'll probably avoid capital gains taxes on the profit, even if you've lived in it for less than two years.
Homeowners who are forced to sell for "unforeseen circumstances" probably will be able to avoid capital gains taxes on the profit. The IRS' definition of those circumstances covers just about everything.
Since 1997, homeowners have been able to exclude up to $250,000 — $500,000 if they're married — in home sale profit from capital gains taxes, as long as they've lived in the house for two of the past five years. The 1997 law also allowed a smaller tax break if "unforeseen circumstances" forced taxpayers to move before they met the two-year requirement.
Now, the IRS has offered guidance on what qualifies as an unforeseen circumstance. While the IRS probably won't give you a tax break for slovenly neighbors, its definition of an "unforeseen circumstance" covers just about everything else, tax analysts say.
"It's almost hard to imagine who isn't covered," says Mark Luscombe, research analyst for tax publisher CCH.
Some examples of events that qualify for a tax break:
• You're transferred or you change jobs. Your new job must be at least 50 miles farther from your home than your former job was. This is the same standard the IRS uses to determine whether you can deduct moving expenses when you change jobs.
• You're selling the home because of divorce or legal separation.
• You can't afford the mortgage. If you're forced to sell because you lost your job or your salary shrunk, you're eligible for the tax break. Even a big increase in your condo fee could qualify as an unforeseen circumstance, says Alan Weiner, an accountant with Holtz Rubenstein in Melville, N.Y.
• You or a member of your family must move for health reasons. For example, if your doctor recommends moving to Arizona to relieve your chronic asthma, you qualify for the tax break. The IRS looks askance at general "quality of life" migrations. Moving from North Dakota to Florida may give you a healthier glow, but it probably won't pass muster with the IRS.
"That's a fairly liberal interpretation of an unforeseen circumstance," says Bob Trinz, editor of RIA's Federal Taxes Weekly Alert. The amount of the reduced exclusion from capital gains taxes will be based on how long you've lived in your home.
For example, suppose you buy a house, and a year later you're transferred to a job in another state. Because you've lived in the house for half the time required for a full exclusion, you could sell your home for a $125,000 profit — or $250,000 if you're married — without paying capital gains taxes. Unless you're moving out of Malibu, it's unlikely your home has appreciated more than $125,000 in a year.
