Selling a Personal Residence
Prior to 1997, there were no exclusions of gains on the sale of a principal residence. Taxpayers could defer a gain by purchasing a replacement residence for an amount equal to or greater than the sales price of the residence sold. There are currently, then, taxpayers who have deferred previous gains. When they sell their home, their basis will be reduced for previous gains not taxed.
Single taxpayers who sell their principal residence can now exclude the gain up to $250,000, and married taxpayers can exclude up to $500,000. To qualify for the exclusion, the homeowners must meet the following tests:
Ownership test. The home was owned by the taxpayer for at least two years.
Use test. Taxpayer lived in the home as the main residence for at least two years.
A gain on the sale of another home that has not been excluded within the last two years.
For married filing jointly, both spouses meet the use test.
Example
Tatyana, a single taxpayer, bought her home ten years ago for $225,000, and she has lived in the home since buying it. In March, she sold it for $375,000. Prior to this home she owned another, which she sold for a $30,000 gain. Tatyana realizes a gain on the sale of her personal residence of $180,000 = $375,000 – ($225,000 – $30,000). Tatyana’s taxable gain on this sale is $0, since she met all of the tests and can exclude up to $250,000.
A seller otherwise qualified to exclude gain on a principal residence who does not meet the two-year ownership and use tests may prorate the exclusion amount if the sale is due to an employment related move, health, or unforeseen circumstances. Unforeseen circumstances include death, divorce or separation, a change in employment that leaves the taxpayer unable to pay the mortgage, multiple births from the same pregnancy, and becoming eligible for unemployment compensation. The $250,000 or $500,000 exclusion amount is prorated by multiplying the exclusion amount by the length of time the taxpayer owned and used the home (in days) divided by 730 days (two years).
Example
Trisha is a single taxpayer who owns and uses her principal residence for eighteen months. Her job has moved so she transfers to another state and sells the residence for a $140,000 gain. Because she may exclude 75% (18 months/24 months) or $187,500 of the $250,000 exclusion amount, none of the gain is taxable.
Go to Publication 17 and read chapter 15: Selling Your Home.
Questions and Problems
Christel sells her home of the last seven years in January for $480,000. She paid $315,000 for the home, and her selling expenses are $24,000. If Christel does not buy a new residence, what is the taxable gain on the sale of the residence?
$165,000
$141,000
$0
Some other amount
Deb is single and bought her home 12 years ago for $225,000. She’s lived in the house since she bought it. In the current year, she sells the home for $482,000. What is Deb’s taxable gain on the sale?
$0
$7,000
$250,000
$257,000
Eliza is single and bought her home 15 years ago for $160,000. She has lived in the home since buying it. In the current year, she sells her home for $400,000. What is Eliza’s taxable gain on the sale?
$0
$240,000
$250,000
Some other amount
Erika bought a house 19 years ago for $120,000, and she has always lived in the house. Two years ago Erika married Hans, and he has lived in the house since their marriage. If they sell Erika’s house for $560,000, what is their taxable gain on a joint tax return?
$0
$190,000
$220,000
$440,000
Gerda bought a house a year ago for $420,000. If Gerda sells the house due to job transfer for $590,000 after living in it for the entire year, what is her taxable gain?
$0
$45,000
$125,000
$170,000
Laura sells her personal residence on September 20 for $321,000. The expenses of the sale are $17,000, and she made capital improvements of $6,000. Laura’s basis in the home was $174,000. What is Laura’s realized gain and recognized gain?
Realized gain $________
Recognized gain $________
Lisbeth, age 67 and single, sells her personal residence during the current tax year for $382,000. She lived there for 40 years, and her basis was $23,000. The expenses of the sale were $19,600. On December 10 of the same year, Lisbeth buys and lives in her new home, which cost $225,000. Calculate Lisbeth’s realized gain, recognized gain, and adjusted basis of the new home.
Realized gain $__________
Recognized gain $__________
Adjusted basis of her new residence $__________
