Chapter11 - Chapter 11 Property Transactions Nonrecognition...

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Chapter 11 Property Transactions: Nonrecognition of Gains or Losses (Rev 08-1-11) Taxable income generally includes gain from the sale or exchange of property. To deduct losses you must rely on statutory permission. Gains - Gains are taxed on any disposition of property, generally, whether by sale, exchange, or other means of disposition. Recognition - Recognition refers to when/if you include the gain in your taxable income. Sometimes Gain on sale may be Deferred: o Temporarily not recognized. o Examples include exchanges of business property for like kind business property, involuntary conversions and certain stock swaps. Excluded o Permanently not recognized. o Examples include sales of personal residences and appreciation up to date of death on inherited property. Sale of Personal Residence (Code Section 121) Rules effective for home sales after May 6, 1997. Taxpayers may exclude gain from the sale of their principal residence: $250,000 of gain if single, or $500,000of gain if married filing jointly. To qualify, taxpayers must: Have owned the house two of the last five years, Have occupied the home as their principal residence two of the last five years. 1
Other Rules This exclusion may be only used once every two years. The basis of the new house is not reduced by the gain excluded. You may elect out of this provision and pay tax on the gain if you wish. Gains over excluded amount are taxable and may not be “rolled over” like in prior law. You may not use the exclusion within five years of acquiring the property through a ‘like kind’ (Section 1031) exchange. Special Rules for married taxpayers The exclusion is allowed if: Both meet the USE test, but Only one meets the OWNERSHIP test. BUT , neither has used their principal residence exclusion in a prior sale within the last two years. What is a ‘Principal Residence”? The main home in which the taxpayer lives. Time spent, religious & group affiliations, licensing, insurance, voting are all factors considered. May only have one principal residence at a time. Proration of Exclusion If the 2 year rule cannot be met because of health, job loss, transfer, or other ‘unforeseen circumstances’, may exclude a portion of the $250k/$500k based on (number of months of residency over 24 months).

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