Selling your home with less than two years of ownership? Safe Harbor exclusions may help you pay less in taxes

Although home prices in the Phoenix metropolitan area have leveled off during 2014, and even dropped in some areas, many homeowners have realized a profit on their homes within the past two years. Selling a home you’ve lived in less than two years, and taking a profit from that sale could result in a tax on that profit.  Once you’ve lived in a home that is your primary residence for two years, you can exclude from taxes up to $250,000 for a single person, and up to $500,000 for married people filing a joint tax return. The IRS has established some “safe harbors”, which reduce or exclude the tax on profit rule if you fall into one of these categories and sell prior to living in your home for two years:

Employment: If the sale of your home before the two year time period is required in order to be within 50 miles of new employment, then there are exclusions to the tax on profit rule that will vary by depending upon the marital and tax filing status of the taxpayer. The regulation defines employment as “the commencement of employment with a new employer, the continuation of employment with the same employer, or the commencement or continuation of self-employment.”

Health: If a change of residence is required due to a specific medical condition, and not just the general health and welfare of a family member, a safe harbor exclusion could be applied to the profit on a home sold with less than two years of ownership. This exclusion may include the need to care for a family member away from the primary residence.

Unforeseen Circumstances: This general sounding category includes some specific challenges for taxpayers such as:

1. Death

2. Employment termination resulting in eligibility for unemployment benefits

3. Change in employment status resulting in an inability to pay the mortgage and basic living expenses

4. Divorce or legal separation

5. Multiple births resulting from a single pregnancy

6. Involuntary conversion of the property such as condemnation or eminent domain

7. Destruction of the property due to man-made disaster such as an act of war or terrorism.

As always, when dealing with tax questions, it’s best to consult a professional. If you would like a referral to a qualified tax consultant, please contact me. And if you’re a DIY kind of person, be sure to read IRS publication 523, “selling your home” available free at IRS.gov/publications.

 

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