Posts tagged " Home "

Tax Proposal: Selling Your House

November 10th, 2017 Posted by Tax Planning No Comment yet

The ability to exclude up to $500,000 of gain on the sale of a principal residence is one of the most popular aspects of the current income tax code.  The House of Representatives’ tax reform bill may modify that benefit.  Click here for an explanation of how the exclusion currently operates.

Tax Benefit at Issue

If you are a home owner, you are entitled to exclude up to $250,000 of gain on the sale of your principal residence ($500,000 if you are married and filing a joint tax return) as long as you meet certain eligibility requirements.  The exclusion itself is not changing, but the eligibility requirements might.

House SoldHolding Period

The current law requires that you must own the house for 2 out of the 5 years prior to the date of sale.  You are also required to use the house as your principal residence for 2 out of the 5 years prior to the sale.

The House of Representatives’ proposal changes this time period.  Under their proposal, you must own and use the house as your principal residence for 5 out of the 8 years prior to the sale.

Income Test

The proposal also imposes a new income test.  In order to claim the exclusion, your modified gross income in the year of sale and the 2 preceding years must average less than $250,000 ($500,000 if you are married filing jointly).  If your income exceeds this threshold, the exclusion phases out.  The phase out is one dollar for every dollar your average modified gross income exceeds the limit.

If you are married and for whatever reason did not file a joint tax return in a preceding year, that year will not be included in determining your average modified gross income.


You will only be able to claim this exclusion once every 5 years.  The rule currently is that it can only be used once every 2 years.

Selling Your Home?

June 1st, 2016 Posted by Tax No Comment yet

Are you looking to sell your home?  Then you may be able to take advantage of a major tax benefit!

Home sale

You may be entitled to exclude $250,000 of gain from the sale of your personal residence.  If you are married, you may be entitled to exclude $500,000 of gain!

In order to exclude this gain, you must meet 3 tests.

  1. Ownership Test.   You must have owned the home as a principal residence for at least 2 of the 5 years prior to the sale.  If married, either or both spouses can meet this test.
  2. Use Test.  You must have used the home as a principal residence for at least 2 of the 5 years prior to the sale.  If married, both spouses must meet this test.
  3. Frequency Test.  The exclusion applies to only one sale every 2 years.  If married, this test is not met if either spouse has claimed this exclusion within the past 2 years.

If both spouses do not meet the use and frequency test, then a portion of the exclusion may still be claimed.  In this case, instead of being able to claim the full $500,000 exclusion, the couple would only be able to claim the $250,000 if one spouse meets all 3 tests.

Even if you do not meet these tests, you may be able to claim a reduced exclusion!  A reduced exclusion is available if you sold your principal residence because of:

  • A change in your place of employment;
  • Health reasons; or
  • Unforeseen circumstances.

There is a safe harbor rule defining what qualifies under each of these three exceptions.

Lets look at an example.  In April 2014, John and Jane Smith purchased a small, 2 bedroom house for $500,000.  In September 2015, Jane gave birth to twins and they decided that they needed a larger home to accommodate their larger family.  In October 2015, with the help of a great realtor, the Smiths sold the same house for $800,000.

The Smiths have $300,000 of gain on the sale of their home.  They are afraid they will have to pay taxes on the full $300,000, but they talk to a CPA and learn that they do not have to.  Although they did not meet the 2 year ownership and use tests, they qualified for a reduced exclusion because the birth of multiple children from the same pregnancy is considered an “unforeseen circumstance.”  Because they owned and lived in the house for 18 months, they are able to take a reduced exclusion of $375,000 which is enough to eliminate their entire taxable gain.  They do not have to pay any tax on the sale and can use the extra $300,000 to buy a bigger house!

Home Office

May 23rd, 2016 Posted by Tax No Comment yet

Because of advances in technology, it is increasingly easy for people to work from home and save money doing so.

Having a home office means that you do not have to spend hours every month sitting in traffic trying to get to work, and you do not have to spend as much on fuel for your car.  It also means, if you own your own business, that you can save thousands of dollars in rent.  But it also is a tax deduction.  By claiming the home office deduction, you are allowed to deduct a portion of your living expenses such as utilities, that would otherwise be non-deductible.

This deduction is available to you whether you own your own business or work for someone else.  But if you are an employee, you must be working from home for your employer’s convenience and not your own.  If your employer requires that you work from home, then that test is met.

Home Office

Unfortunately, this deduction has been greatly abused by taxpayers and now the IRS is very strict in ensuring that your home office meets all of the requirements for the tax deduction.

The home office deduction is only permitted if the home office is used exclusively on a regular basis either: 1) as the principal place of business for any trade or business of the taxpayer; 2) as a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his or her trade or business; or 3) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

To qualify under the “regular use” test, the home office must be used on a regular basis.  Working from home once a month does not count.

To qualify under the “exclusive use” test, you must use a specific area of your home exclusively for your business.  Even after “business hours,” you cannot use the space for non-business purposes.  Something as simple as your children “hanging out” in that room when you are not conducting business disqualifies the whole deduction.

However, if your home office meets these tests, the deduction can be substantial.  Under a new safe-harbor, the deduction is $5 for every allowable square foot, up to 300 square feet.  The deduction can be even greater if you keep track of all of your actual expenses, such as your mortgage, property taxes, and utilities.