Question

1. What is the treatment of any gain or loss on the sale of a primary residence? Is replacement property required as it is in a like-kind exchange? Is the gain or loss on the sale of a primary residence deferred or eliminated?

2. What are the requirements that must be met to receive treatment as a primary residence?

3. If the taxpayer does not meet the time requirements are there any exceptions? If so, how does that work?

Answer 1

What is the treatment of any gain or loss on the sale of a primary residence?

According to U.S. federal income tax purposes, you may be able to exclude from income any gain on the sale of a house up to $250,000 ($500,000 for a married couple filing a joint return). Generally, to exclude the gain, you must have owned and lived in the property as your main and primary home for two of the five years prior to the date of the sale. If you lose money on a sale, the loss is not tax deductible.

The formula for determining your gain or loss is as follows:

Selling price − Selling expenses = Amount realized

Amount realized − Adjusted basis = Gain or loss

The cost basis may generally be adjusted over time due to the following conditions that are as follows:

• Additions and other improvements or changes that have a working useful life of one year and that add to the value and key factor of your house. These may include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Repairs that keep your house in good and well being condition but do not directly and properly enhance value, such as fixing gutters, repainting, or plastering, do not affect the basis.
• Special assessments and amount paid for local improvements
• Amounts paid or spent to restore and maintain damaged property
• Payments of amount for granting an easement or right-or-way
• Depreciation if the home was used for business or rental purposes specialised.
• Left off determined by the Internal Revenue Service conditions.

A "main home," according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your benefit to maintain proper records of a house's purchase price, purchase expenses, improvements or changes, extra additions, and other issues that may affect the adjusted basis.

If you purchased or built your home, your initial cost basis typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is usually the fair market value on the date of the decedent's death or on a later valuation date selected by a representative of the estate. In some circumstances, the cost basis may be the fair market value on the date that is six months after the decedent's death, which will depend on whether the decedent's estate is subject to federal estate tax and whether the alternative date would reduce the federal estate tax due from the decedent's estate.

Is replacement property required as it is in a like-kind exchange?

Like-kind property is expressed as to its nature or characteristics, not its quality or grade. There is a wide range of exchangeable real properties. Vacant land can be exchanged for a commercial building, for example, or industrial property can be exchanged for residential. But you never ever/can’t exchange real estate for artwork, for example, since that does not meet the definition of like-kind. The property must be held for investment though, not resale or personal use. This usually implies a minimum of two years’ ownership.

To avail the proper benefit of a 1031 exchange, your replacement property must be of equal or greater value. You must check a replacement property for the assets sold within 45 days and then conclude the exchange within 180 days. There are three rules that can be applied to define identification. You need to meet one of the following:

●The three-property rule allows you to identify or check three properties as potential purchases regardless of their market value.

The 200% rule allows you to verify or identify unlimited replacement properties as long as their cumulative value doesn’t exceed 200% of the value of the property sold.

●The 95% rule give permission you to check oridentify as many properties as you like as long as you acquire properties valued at 95% of their total or more.

Is the gain or loss on the sale of a primary residence deferred or eliminated?

A taxpayer's principal residence is a capital asset. on the sale of a principal or primary residence, the taxpayer realizes capital gain or loss. However, no loss is recognized, because a residence is personal in nature. In the case of a sale that produces gain, the Code, as amended by the Taxpayer Relief Act of 1997, provides an exclusion from income for a portion of such gain. Prior to the 1997 Act, 2 special tax provisions could be used to defer or exclude the recognition of such gain: the former home sale rollover rule and the former age 55 or older exclusion rule.

CURRENT LAW effective 1998

The house-sale exclusion rule allows a taxpayer to exclude from income gain realised from the sale or exchange of property if, during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal or primary residence for a period aggregating or combined two or more years.  The exclusion is allowed each time a taxpayer meets the eligibility requirements and conditions, but mostly no more frequently than once every two years.  The age requirement under pre-1997 Act law is eliminated. This new provision replaces the former rollover and former one-time exclusion provisions. The excluded amount is a gain of up to $500,000 married filing joint, or $250,000 for a single taxpayer.

OLD RULE Deferred Based on Purchase Price of New Home

The former home sale rollover rule permitted a taxpayer to defer the recognition of gain on the sale of a principal residence if the taxpayer purchased a new principal residence within the four-year period commencing two years before and ending two years after the sale of the old residence.  If the cost of the new residence was equal to or greater than the selling price (calculated with certain proper adjustments) of the old residence, no gain was recognized. However, the adjusted basis of the new residence had to be deducted by the amount of gain not recognized. This ensured that only a deferral, rather than exclusion, of gain resulted; the deferred gain will be recognized upon the sale of the new residence (unless rollover treatment applied to that sale).

OLD RULE Based on Age 55

The former age 55 or over exclusion rule allowed a taxpayer who was at least age 55 at the time of the sale of the principal residence to exclude up to $125,000 of gain. The exclusion was elective, and could be used only once during the taxpayer's lifetime. To qualify for the exclusion, the taxpayer must have owned and used the property as a principal residence for at least three of the five years preceding the sale. In the case of a sale of a residence jointly owned by spouses, one of whom satisfied these requirements, both spouses where treated as satisfying the requirements.

The rollover allowed homeowners who sold a principal residence to defer tax on any profit if they purchased a new home within two years at a price equal to or greater than the sales price of the old one. However, unlike under current law, this was not a tax exclusion. It was only a tax deferral, which meant that ultimately you might have to pay a capital gains tax when you sold a home for the last time.

The rollover was in force through May 6, 1997. The Taxpayer Relief Act of 1997.

For sales of a principal residence after May 6, 1997, married couples can exclude from their taxable income up to $500,000 of capital gain. Individuals filing separate returns can exclude up to $250,000.

Important conditions

1. owned the home and used it as their primary residence in at least two of the five years preceding the sale of the property.
2. They did not acquire the home through a like-kind exchange in the past five years.

They did not exclude the gain from the sale of another home two years prior to the sale of this home

In most situations, individuals buy and sell their personal homes without any consideration of the possible effect income taxes may have on the profit realized on the sale of their home.

For many individuals, a large portion of their personal wealth may be vested in their home, which has a large accrued gain.

If you have recently sold or are considering the sale of your home, you need to assess if the principal residence exemption really applies to exempt the sale of your Principal Residence (“PR”) from income tax.

Principal Residence Exemption Tax Issues When Selling

One of the largest tax breaks have is the ability to claim the principal residence exemption (“PRE”) on the sale of their homes. The PRE provides a homeowner with an exemption from tax on the capital gain earned when they sell the property that they have designated as their principal or primary residence.

Does the Principal Residence Exemption Really Apply?

Individuals buy and sell their personal homes without any consideration of the possible checkout effect income taxes may have on the profit earned on the sale of their house.

For many individuals, a large portion of their personal wealth may be vested in their home, which has a large accrued gain.

If you have recently sold or are considering the sale of your home, you need to assess if the principal or primary residence exemption really applies to exempt the sale of your Principal Residence (“PR”) from income tax.

Does the Sale Meet the PRE Requirements?

For most situations, your answer to the following questions will determine whether you meet the technical requirements for claiming the principal residence exemption in Country.

1. Have you been a resident in Country for the entire period that you owned your property?

2. Is the land you own greater than one-half hectare or 1.2 acres in size?

3. Do you own another property, such as a vacation or recreational property?

4. Have you ever rented out a portion of the adjoining land and buildings on the property?

5. Have you ever used the property in the course of earning income from a business or farming operation?

6. Do you and your spouse (or common-law partner) own separate properties?

Conditions based on your answers, the principal residence exemption may, or may not, apply to the tax-free sale of your home. It all depends on your specific situation as per circumstances....

how the PRE rules apply..... . .

Principal or primary residence for a particular year, you must verify it as such for the year and no other property may have been so designated by you for the year. no other property may have been designated as the Primary residence of any member of your family unit for the year. For purposes of the latter rule, which applies for 1982 and subsequent years, a family unit is you, your spouse (or common-law partner) and any children under the age of 18.

For 2016 and later tax years, you can only utilize the principal residence exemption if the sale is reported and a designation of PR is made in your tax return for the year of sale. If the disposition is not reported or you forget to file the designation, the full amount of the capital gain will be taxable.

How is the Principal Residence Exemption Calculated?

The conditions for sheltering the capital gain realized on the sale of a home from personal income tax is based on a formula provided in the Income Tax Act The exempt portion of the capital gain is calculated by using the following formula:

A × (B ÷ C)

The variables in the above formula are as follows:

A is the taxpayer’s capital gain otherwise determined.

B is:

• If the taxpayer was resident in Country during the year that includes the acquisition date, 1 + the number of tax years ending after the acquisition date for which the property was the taxpayer’s principal residence and during which he or person was resident in Country; or

• If the taxpayer was not resident in Country during the year that includes the acquisition date, the number of tax years ending after the acquisition date for which the property was the taxpayer’s principal residence and during which he or person was resident in Country.

C is the number of tax years ending after the acquisition date during which the taxpayer-owned the property (whether jointly with another person or otherwise).

Check out in what years the property was your principal residence. Capital gains from years when the property wasn’t principal residence will be taxed. CRA’s formula for determining tax for Canadian residents is:*

([1* + number of years designated]/number of years owned) x gain = exemption amount

*Foreign residents don’t get the plus one.

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