March 12, 2004  Email this  Print this
 License or reprint this articleTAX TIPS
Tax-Free Home Sale
by Kevin McCormally  If you sold your home last year, there's a good chance you don't have to tell the IRS about the deal -- even if you made a healthy profit. The law makes the first $250,000 of profit on the sale of a home tax-free if you meet a couple of tests. The quarter-million-dollar limit is for single returns; it doubles to $500,000 if you're married and file a joint return with your husband or wife.
You qualify for tax-free profit on your home sale if:
- You owned and lived in the house for two of the five years leading up to the sale; and
- You did not sell another house -- and claim tax-free profit on the deal -- in the two years leading up to the time you sold this house.
If you pass those tests and the selling price of the house was under the tax-free limit for your filing status, it is certain that you have no profit to report. So the IRS doesn't want to hear about it.
If your place sold for more than $250,000 or $500,000, you subtract your "basis" from the amount realized to see if you have a taxable profit. Your basis is what you paid for the house, plus the cost of any improvements over the years -- and minus any profit from the sale of previous homes that, under the old law, you rolled over into this house. (Before the middle of 1997, homeowners could defer the tax on home-sale profit by buying a new home that cost at least as much as the one that was sold. Any profit on a sale that was not taxed was considered "rolled over" into the new house, to be taxed when that property was sold, unless it was rolled over again. The rollover rule has been replaced by the tax-free profit break.)
There's more good news if you used part of the house for business purposes. Say you had a home office for which you deducted expenses or rented out a room. In the past, homeowners in that situation couldn't count profit from the business part of the house as tax-free home-sale gain. Instead it was taxed as profit from commercial real estate. But in 2003, the IRS decided to forget about that distinction.
You no longer have to allocate profit between the home and business part of the house. This change of heart was retroactive, too. So if you reported taxable profit from the sale of a home because of the old home office rule, you can file an amended return to retrieve tax paid with your 2000, 2001 or 2002 return. (The part of the profit attributable to depreciation on the business part of the house is still taxable.)
If you have a taxable profit, report it on Schedule D, the same form you use to report the sale of stocks, bonds and mutual funds.
Next week: How to handle a sale if you don't meet the two-out-of-five year test.
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