2006-05-25 

Many of you have heard you may qualify for an exclusion of tax on the gain on the sale of your principal home and then found you didn’t qualify when you went to file your tax return. New IRS regulations may now qualify you and you may be able to file an amended return and receive a refund. The rules say the taxpayer may exclude up $250,000.00 (500,000.00 if married) of gain (profit) from the sale if the taxpayer owns and uses it as a principal residence for at least 2 of the 5 years before the sale and did not use this exclusion for another home within the 2 year period ending in the sale date of the current home. If you do not qualify not all is lost. You may qualify for a partial exclusion. The IRS has issued new regulations that clarify and allow many taxpayers to take the partial exclusion if you meet a very liberal “overall facts and circumstances test”. For example, you moved into your new home and didn’t know before you purchased of the heavy traffic due to a road widen project by the city. You may qualify for a partial exclusion due to an unforeseen circumstance. Other exclusions such as change in employment, or health conditions of a qualified individual may qualify you for a partial exclusion. A qualified individual can be the taxpayer or spouse, co-owner, any person who lived in the same household. The bottom line is the IRS is on your side on this issue. There are many other circumstances too numerous to list giving you every reason to run back to your accountant if you paid a tax on the sale of your residence sold after May 6^th 1997 and get an amended return filed.  

The IRS position has also given a big tax break to those who have a rental unit as part of there primary residential building. In the past if you sold your home and part of it was used for business or rental income you would have had to make an allocation and pay capital gain on that portion of the sale. In December 2002 the IRS issued regulations, for 2003, stating you would not need to allocate between personal and rental portions as long as the rental portion of the house occurred under same roof. This means you no longer have to pay tax on that rental portion unless the rental portion was from a detached portion of the home. But, you will have to pay tax on the depreciation amount you’ve taken after May 6^th 1997 

Also, nothing new, you can temporarily rent your home out and still receive the same tax free treatment. In a soft real estate market some people will temporarily rent their home waiting for a sale. You must report the income, but you can write off the expenses up to the amount of income you collect. Be careful where you treat the income and expenses. The income must go on the 1040 as other income and the expenses must be itemized as miscellaneous other deductions, losing 2% of you adjusted gross income. 

Staten Island Chamber of Commerce
The Business Guild II
Gregory Argila
GArgila@aol.com
Accounting and Tax Services
32 Narrows Rd South
718-273-7400 

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