The Internal Revenue Service recently issued final rules that could reduce capital-gains taxes for some homeowners.
Current rules allow taxpayers to exclude $250,000 in gains for single sellers and $500,000 for married sellers if they have met certain criteria.
Ann vom Eigen, legislative and regulatory counsel for the American Land and Title Association (www.alta.org), writes, “The IRS has finalized rules for the treatment of taxpayers who do not qualify for the maximum exclusion of capital gains on home sales because they have not owned and used their property as their principal residence for two of the past five years, or have taken an exclusion within the preceding two years.
“The rules significantly expand the situations under which capital gains exclusions may be taken,” she writes on the ALTA Web site.
In essence, if a homeowner found it necessary to move before the two-year period, he or she would owe capital-gains taxes on the gain under the two floor amounts — $250,000 or $500,000.
There always have been exemptions under the code to allow for at least some relief from taxation if the homeowner had extenuating circumstances, such as a change in place of employment, health or unforeseen circumstances.
Under the final rules,”safe harbors” are established for taxpayers to qualify for these exclusions of capital-gains taxes.
“Unforeseen circumstances” has been the most confusing section of the rules, though it points out that the IRS is not heartless when it comes to taxes and hard times.
What determined unforeseen circumstances seemed to be considered on a case-by-case basis in the past. Now the IRS has named an unforeseen circumstance as “an event that the taxpayer could not reasonably have anticipated.”
In addition, the unforeseen circumstance could affect someone in the household other than the taxpayer,such as the taxpayer’s spouse or a dependent who lives in the house.
Safe harbors under the unforeseen section include, but are not limited to:
A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence.
The cessation of employment as a result of which the individual is eligible for unemployment compensation.
A change in employment or self-employment status that results in the taxpayer’s inability to pay housing costs and reasonable basic living expenses for the taxpayer’s household.
Divorce or legal separation under a decree of divorce or separate maintenance.
Multiple births resulting from the same pregnancy.
If you find yourself in an unforeseen circumstance, you may be in luck, as it were, for your hardship.
It means you may be able to pay less in capital-gains taxes or be exempt from the tax altogether. The tax would be calculated based on how long you had lived in the property, among other criteria.
Check with your accountant to be sure, and you can use the online capital-gains calculators below to get started.
Members of the military and Foreign Service also have some final rules on the length-of-stay test.
ALTA also reported that under the military exception, “A taxpayer serving (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service may elect to suspend the running of the five-year period for up to 10 years.”
“The exception for members of the Foreign Service and the military is retroactive to May 7, 1997,” ALTA says.
For the full text of the final revisions, visit the Federal Register online at www.gpoaccess.gov/fr. Search for Page 50302.
Capital-gains calculators: Certified Residential Specialists (www.crs.com/14_resources/7_calculators.html), Homegain.com ( www.home-gain.com/tools/CapitalGains), Moneychimp.com (www.moneychimp.com/features/capgain.htm).
M. Anthony Carr has written about real estate for more than 15 years. Reach him by e-mail (email@example.com).