IRS Releases Final Home Sale Exclusion
Regulations. If you have owned your home and used it as your principal residence
for at least two out of the last five years, you can exclude up to $250,000 of
the gain ($500,000 on a joint return) when you sell it. The IRS recently
issued new regulations that, in several situations, expand this rule.
For example, contrary to an earlier IRS position, the new regulations
generally allow you to exclude gain that would otherwise be allocable to your
qualified home office (except gain is triggered to the extent of depreciation
taken on the home office after May 6, 1997). The new rules also allow you to
exclude gain when you sell land adjacent to your residence so long as the land
is sold within two years of the sale of your home and the land has been owned
and used as part of your residence for the required period. In addition, the
regulations provide rules that will automatically allow you to claim a portion
of the exclusion when you have not owned and used the residence for the
required two-year period, but you sell the home because of a change in place
of employment, for health reasons, or because of certain unforseen
circumstances. For example, the
new regulations say that you are entitled to relief if you move: for health
reasons pursuant to a physician’s recommendation; because of an employment
change satisfying a 50-mile test; or because of a divorce, legal separation,
or natural disaster. Tax Tip. These rules are
retroactive (generally for three years) and provide relief in many situations.
If you think that you have previously filed a return reporting a house gain
that may be excluded under these new regulations, we can help you determine
whether you should amend that return and recoup the taxes paid.
The
Home Office Deduction.
Recent
tax law changes have made it easier for you to qualify for home office
deductions (e.g., depreciation, insurance, utilities, repairs and
maintenance). If you're
self-employed, you only have to establish that you use your home office
"regularly and exclusively" to perform management or administrative
duties for your business and there is no other fixed location
where you perform substantial management
or administrative duties relating to that trade or business.
If you are an employee, in addition to meeting the above requirements,
you must also establish that your home office is "for the
convenience of your employer" (this generally means you're not provided
an office at work). Tax Tip.
The IRS says that if you have a qualifying home office, you can deduct
any travel from your home office to another work location as a business
expense. So, by having a qualified home office, you will generally have more
deductible business travel. Furthermore, if you're an employee who qualifies
for home office deductions, you should ask your employer to reimburse your
home office expenses. This reimbursement should be excluded from your income
if reimbursed under an "accountable reimbursement arrangement."
If you are an employee and your home office expenses are not
reimbursed, the home office expense deduction will be reduced by 2% of your
adjusted gross income.
Renting
Your House To A Relative Can Be Tricky. If
you are renting a house to a relative as their principal residence and they
pay you fair rental value, you will be able to deduct depreciation and your
other rental expenses (e.g., utilities, insurance, repairs and maintenance).
However, if they pay you less than fair rental value, you may only deduct
interest and taxes. Tax Tip.
Always get independent, written confirmation of the market rental value
of any house you rent to a family member, and charge at least that amount if
you want to deduct depreciation, insurance, repairs and maintenance.