If you have resided in your home for at least two to five years as your primary residence and you sell it, you could gain as much as $250,000 if you are single and $500,000 if you are married and not owe the Internal Revenue Service.
If you live in the home as a primary residence for less than two years, you might still be able to avoid taxes through reduced gain exclusion. The reduced exclusion is based upon an Internal Revenue Service equation that uses the amount of time you actually resided in the home as your primary residence as the numerator and the denominator is the two required years. By using this formula you calculate the exact amount of the gain exclusion. You qualify for the exclusion if you can prove that the premature sale took place because of health problems, a change in employment status, or extenuating circumstances beyond your control.
If you state health as the reason for the premature sale, you must be moving in order to procure treatment or a cure for a disease, or to seek other medical care. The qualified individual must be someone who resides within the home as his or her primary residence. If you have a doctor's validation of the health circumstances, the exclusion is usually granted immediately.
If employment is cited as the cause for the premature sale, you must have to move at least fifty miles away from the residence in question. There are no exceptions to this rule. You can try, but if you are not moving at least fifty miles away, chances are the exclusion will not be granted under these conditions.
If you claim unforeseen circumstances as the cause for the premature sale, your reasons could vary widely. Death and divorce qualify as unforeseen circumstances. A natural or man-made disaster would qualify under unforeseen circumstances. If something intense happened that forced you to sell your home, the chances are good that you qualify under unforeseen circumstances. The qualifying individual under unforeseen circumstances is anyone who resided in the home as their primary residence.
If you use your home as a business or rental property, the entire house qualifies for the exclusion gain. Only if your gain was attributed to depreciation deductions before May, 1977 would you have to pay tax. Remember, as well, that the rental property or business must have been within the primary residence in order to qualify.
If you are selling your home for a substantial profit, it is highly recommended that you consult with a real estate or tax expert in order to fully understand how the capital gains exclusions apply to your particular situation. A home is usually a taxpayer's largest investment and you cannot afford to make any critical tax errors when it comes to capital gains from the sale of your primary residence. The wrong decision could have you in a lot of trouble with the Internal Revenue Service or cost you thousands of dollars in income.
Home is the biggest asset for most of the people. When you sell it, you should do it with knowledge of tax implications; otherwise you may land up in huge tax liability. How IRS looks at the transaction? What are the exemptions and deductions you should not miss? Chintamani Abhyankar discusses useful tips.
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