2-year residency is key to $500,000 tax break

Moneyline

July 23, 2000|By Neil Downing | Neil Downing,PROVIDENCE JOURNAL

If you sell your house at a profit, how much - if any - tax will you owe?

Here's the general rule: If you sell your house at a profit, and you've owned and lived in it for at least two of the five years before the date of the sale, you can escape federal income tax on up to $500,000 of the profit if you're married, or up to $250,000 if you're single.

And, you can then buy another house, live there two years, sell it at a profit, and once again take advantage of this tax break, said Kevin F. Long, chairman of the technical advisory board for the Massachusetts Society of Certified Public Accountants.

In addition, if you qualify for this tax break, you need not report the sale on your federal income tax return, said Long, a lawyer, CPA and partner at Hinckley, Allen & Snyder LLP, a law firm with offices in Boston and Providence, R.I.

At one time, the rules were more complicated. In general, you could postpone the tax when you moved from house to house, but you had to fess up if, for example, you finally sold and moved to an apartment.

You could escape the tax altogether, but only if you were a certain age, your profit was below a certain amount, and you met some other rules. (And if you met all these rules, you could escape the tax only once in your lifetime.)

The new law was enacted in 1997, and makes things a lot easier for most people.

Some other points:

* You need not have lived in your main house for two consecutive years to qualify for the break; you generally can take advantage if you've lived there for two of the previous five years.

* The tax break applies only to your principal residence, not to a summer home or vacation home. (However, some readers have sold their main house, converted their vacation house to their main house, lived there for two years, sold it at a profit and used the tax break again.)

* Whether you'll have to pay a state income tax depends on where you live.

If you sell your main house for more than $500,000, the rules can get complicated, so seek professional help. (You should also seek help if you've used your home for business purposes or as rental property, or if you financed your home under a federally subsidized program.)

There are lots of other rules regarding this tax break, too many to list here. For more information, see Internal Revenue Service Publication 523, "Selling Your Home." For your free copy, visit your local IRS office, call the IRS at 1-800-829-3676 or see the IRS' Web site: www.irs.gov.

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