Tip of the Week: Home Sale Exclusion

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	Home Sale Exclusion Financial Tip of the Week by Deloitte & Touche OnLine March 15, 1999

Know the rules in this busy home-selling season.

See our archive of previous tips on your money, your taxes and your financial plan.

Home sales are at record levels, again in 1999 compared to 1998. With many families moving to new homes -- and moving equity -- it's wise to know the rules about excluding capital gains on the sale of a home.

The Taxpayer Relief Act of 1997 included a lucrative exclusion for individual taxpayers who have realized a gain from the sale of their principal residence. The new law applies to sales occurring after May 6, 1997, and replaces the old gain rollover rule (deferral of gain), as well as the $125,000 "once in a lifetime" exclusion of gain from the sale of a principal residence.

The gain or loss on the sale of a home is generally based on the selling price less expenses of the sale and the taxpayer’s adjusted basis in the home. Adjusted basis is defined as the original cost plus improvements minus any deferred gain from previous rollovers.

All or part of the gain from the sale may be excluded from income if certain ownership and use tests are met. The exclusion is allowed once every two years, and the maximum exclusion is $500,000 for married persons filing a joint return ($250,000 for single taxpayers). Any gain in excess of the exclusion will be taxed at the capital gains tax rates. To be eligible for the exclusion, the seller must have owned and used the home as a principal residence for at least two years (730 days) out of the previous five years.

For more information, see our article on the home sale exclusion in the Personal Financial Advisor section.