Everyone knows that you can only use the capital gain exclusion once every 2 years, right?
Wrong.
Qualified taxpayers generally can only use the whole exclusion once every 2 years, but in some cases, you can take a partial exclusion within the 2 year period after you have claimed the whole exclusion.
Or, again in some cases, you may be able to claim a partial exclusion of capital gain on the sale of a home even if you haven’t lived in it for the full 2 years.
Here’s an example. John and Mary have lived in their personal residence for 3 of the last 5 years. They are both on the title. They sold the home on 1/1/23 and bought a new home in the same area. The capital gain on the sale of their old home was over $500,000 and they claimed the entire exclusion on their taxes.
14 months later, John’s employer offers a hefty promotion. It seems too good to turn down and they are wrestling with the decision. Their recent home purchase was a great deal and they already have over $100,000 in equity. Knowing they just sold a home and claimed the capital gain exclusion, they worry about paying the taxes on that gain if they sell that new home.
So, what do they do? Their marginal tax bracket is 35%. Do they forego the promotion to save on taxes but lose the increase in wages?
Actually, there’s no need to do that.
If they qualify for a reduced exclusion, the gain on the 2nd home sale may not be taxable at all, or only a part of it might be taxable.
If the primary reason for the sale is 1) a change in workplace location, 2) a health issue, or 3) an unforeseeable event, you can claim a partial exclusion of gain on the sale of a primary residence, even if you claimed the exclusion less than 2 years ago.
If you’re in this situation, give us a call. We can help you determine if you’re eligible for the exclusion of gain and how much of the gain can be excluded in such a situation. Don’t make a decision until you know all the facts.
And, if you’ve already experienced this, and didn’t claim a partial exclusion even though you may have been eligible, you may be able to amend your return and claim the exclusion in later years. Another reason to give us a call.
Aurora Financial Services – real estate tax planning
303-745-3962
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