CHAPTER 12 – FALL 2011
Sale of Personal Residence.
A. Taxpayers may exclude up to $250,000 of gain, [$500,000 for taxpayers filing a joint return]
on the sale of their principal residence.
If a single taxpayer who otherwise is eligible for an exclusion marries someone who used
the exclusion within two years, the maximum exclusion is $250,000.
To be eligible for the exclusion, a taxpayer must have owned the residence and occupied
it as a principal residence for at least two of the five years prior to the sale or exchange.
Example 41, page 21.
For property settlements pursuant to a divorce proceeding, or death of a spouse, the
period the taxpayer owns the property and uses it as a principal residence includes the
time the transferor owned and used the property.
For taxpayers who own a residence before marriage and sells it after marriage, the spouse
must live there 2 years to receive the $500,000 exclusion.
Example 44, page 22.
If a taxpayer marries and his or her spouse sold a home withing two years, only $250,000
of the exclusion is available.
Examples 45-46, page 22.
Determination of Gain Realized.
Amount Realized less Basis.
Amount Realized equals the contract price less selling expenses (commissions, legal
expenses, termite inspection fee, etc.).
Basis equals cost plus improvements less gain deferred under the former rollover
provisions (from sales prior to May 7, 1997).
Examples 38-39, page 20.
The gain exclusion does not apply to the portion of the gain attributable to depreciation
allowable with respect to the rental or business use of the principal residence after May 6,
For taxpayers who claim a home office deduction (which includes allowable
depreciation), they must weigh the benefits of claiming a current depreciation
deduction and the cost of reporting future gain (to the extent of depreciation) in the
year the residence is sold.
Failure to meet two-year rule requirements.
A taxpayer who fails to meet ownership and use requirements by reason of a change of
employment, health, or unforeseen circumstances, is able to exclude a portion of the gain.