Capital Gains Info

IRS Finalizes Capital Gains Regs

There have just been some important final clarifications to the rules about capital gains on profits from the sale of a house, especially if you keep the house for less than two years.

Congress made the basic streamlined tax code changes back in 1997 and 1998. But, the IRS has just gotten around to issuing the final regulations that tell early sellers how much – if any - of their profits they can shelter from the federal capital gains taxation.

Here’s how it goes…

Basically, the new regulations deal with exceptions to the $500,000 and $250,000 tax-free exclusion provisions of the 1997 and 1998 statutes.

Those laws allow married, joint-filing home sellers to pocket up to $500,000 in sale profits ($250,000 for single filers) tax-free, provided that they owned and used the house as their principal residence for an aggregate two years out of the five years preceding the sale of the property.

They also provide exceptions for certain homeowners who, for reasons of health, employment change or "unforeseen circumstances," sell their homes before they were able to meet the two-year minimum holding standard. Qualified home sellers will get a "reduced maximum" capital gains tax exclusion, based on the amount of time they owned and used the house.

So, for example, a couple who bought a house and had to sell it just 18 months later because of an unexpected employment transfer could be entitled to take up to three-quarters of the maximum $500,000 tax-free exclusion. A single owner who had to sell after a year of ownership because of an incapacitating, unexpected illness might qualify for half of the standard $250,000 maximum.

What exactly are "unforeseen circumstances"? For starters, you can’t claim that you experienced an "unforeseen circumstance" in the event you win the lottery and have developed an overwhelming desire to own a bigger, better house. Sorry.

What does qualify as circumstances "that the taxpayer could not reasonably have anticipated" at the time of purchasing the house includes:

• A change in employment status that results in the owner's inability to pay housing costs and reasonable basic living expenses for the household.

• The "involuntary conversion" of your home; for example, when the state government requires you to sell your house to make way for a highway.

• Natural or man-made disasters or acts of war or terror that damage the residence.

• The death of the homeowner, a spouse, co-owner or other person whose principal place of residence is the house that was sold.

• A loss of employment triggering eligibility for unemployment compensation.

• Divorce or legal separation.

• Multiple births resulting from the same pregnancy.