In: Accounting
Discuss the how residence sales are treated under the tax law. You may want to refer to Section 121 of the tax code and to the IRS publication 523. What are the requirements for it to qualify as a "residence" sale? What are the limitations? Why does the law provide this benefit to taxpayers? What if the taxpayer has more than one home, can 2 or more homes qualify? What is the 2-year rule all about?
Solution:-
You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
Gain
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
Loss
You cannot deduct a loss from the sale of your main home.
Worksheets
Worksheets are included in Publication 523, Selling Your Home, to help you figure the:
Reporting the Sale
Do not report the sale of your main home on your tax return unless:
More Than One Home
If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
Example One:
You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.
Example Two:
You own a house, but you live in another house that you rent. The rented house is your main home.
Business Use or Rental of Home
You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.
Example:
On February 1, 1998, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.
Five Year Period | Used as Home | Used as Rental |
2/1/98-5/31/99 | 16 months | |
6/1/99-3/31/01 | 22 months | |
4/1/01-1/31/03 | 22 months | |
38 months | 22 months |
Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.