out15 - 1 CHAPTER 15 Sale of Principal Residence A Current...

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CHAPTER 15 Sale of Principal Residence A. Current rule 1. A taxpayer generally may exclude up to $250,000 on the sale of a primary residence 2. Requirements: Ownership and Use Tests a. The taxpayer owned the residence for 2 of the 5 years prior to the sale. b. The taxpayer used the home as his primary residence for 2 of the 5 years prior to the sale. c. No gain was excluded under this provision within the two years preceding the sale. 3. The exclusion is generally $250,000 but may be increased to $500,000 for married taxpayers if: a. The taxpayers file a joint return b. One spouse owned the residence for five years c. Both spouses used the home as their primary residence for two years. d. There is no partial increase (e.g., a new spouse lives in the home for 1 year does not allow an increase from $250,000 by an extra $125,000) 4. A fraction of these amounts is allowed if the two of five year tests were not met because of a change in the taxpayer’s work location, health, or other qualifying unforseen circumstance (e.g., live in 8 months and then transferred, get 8/24 of $250,000 or $500,000). 5. Applying the ownership and use tests (the 2 of 5 year rule) a. If spouse dies, surviving spouse deemed to have owned and lived in the residence for the same time as the decedent. b. If home owned separately by one spouse (e.g., husband) and transferred to the other spouse (e.g., wife) in a divorce, the recipient spouse (e.g., wife) is deemed to have owned the residence for the period owned by the transferor spouse (husband). 6. Depreciation a. Gain must be recognized to the extent of any depreciation allowed after May 6, 1997. 7. Election out is available. e:\328\s1031etc. 1
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C. Old rule [§ 1034]: No longer applicable 1. No gain recognized to extent sales proceeds (adjusted sales price) were reinvested in another principal residence within 2 years before or after the sale 2. Gain was deferred temporarily by making reducing the basis of replacement residence for the gain not recognized D. Computations 1. Gain or loss realized: Sales proceeds -Selling expenses =Amount realized -Adjusted basis
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