Eye the calendar carefully if you plan to sell your home and are near age 55. You may get a tax bonus by putting off the sale until after you become age 55.
Under-55 sellers are able to postpone taxes on the profit from the sale of a year-round home only if they buy another dwelling that costs as much as the sales price of the old one, whereas over-55 sellers have the option to permanently exclude from tax up to $125,000 of the gain without the need to buy a replacement residence. To claim the over-55 break, you have to own and use the property as your principal residence for at least three years out of the five-year period ending on the sale date.
CAUTION: The sale date must be after the date on which your 55th birthday falls, not just after the start of the year you reach 55. However, you become 55 a day early for sale purposes. Say you were born on Dec. 12; you turn 55 on Dec. 11, the way the IRS keeps count.
TIP: The law does not require you to postpone signing the sales contract until after your birthday. What controls whether you are eligible for the exclusion is the date of the closing, not the signing of the contract. Legally, the sale does not take place until the transfer of title at closing. So if someone makes you an offer that you cannot refuse, you do not disqualify yourself for the exclusion by signing the contract in advance of your birthday, provided you reach age 55 by the date of the closing.
OWNERSHIP AND USE: In calculating whether you satisfy the requirement that the residence be owner-occupied for at least three out of the five years just before the sale, you cannot count as part of those three years the time you spent in a previous home (or homes) on which the gain was tax deferred. Those three years, though, need not be consecutive; they can be off and on for a total of three full years.
TIP: Short, temporary absences for vacations or other seasonable absences count as periods of owner use. This is so even if you rent your home out during those periods of absence.
SPECIAL RULE: There is a limited exception to the used-for-three-out-five-years requirement. For sales after Sept. 30, 1988, the requirement does not apply to a seller who becomes physically or mentally incapable of self-care (that is, disabled). The use test is passed by a seller who uses the home for at least one year and during any of the remainder of the five years becomes disabled and has to live in a nursing home or other facility for disabled individuals.
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