Capital gains tax on sales: 2 cases


December 14, 2003

Some readers have inquired about capital gains taxes on the sale of a residence.

One reader writes that she sold her Glyndon home to her daughter in July. There was no down payment and the reader is carrying the mortgage. Her daughter is repaying the loan at the rate of $300 a month plus interest.

The reader asks if she has to pay capital gains taxes on the sale.

Another reader writes that she has owned a house in New York since 1990. In 1993, she married and moved to Maryland. She rented the house until 2002, when she returned to New York and moved back into the home. She plans to sell the house next year.

She wants to know if she'll have to pay capital gains taxes on the sale.

Dear readers:

A single taxpayer may elect to exclude from gross income up to $250,000 of the gain on the sale of a home. This applies if the taxpayer has owned and used the property as a principal residence for periods totaling at least two out of the five years preceding the sale.

For married couples filing joint tax returns, up to $500,000 of gains may be excluded.

A more limited income tax exclusion is available for taxpayers who are prompted to sell their principal residence by change of employment, health or "unforeseen circumstances," as defined in Internal Revenue Service regulations.

The exclusion is denied if the taxpayer has excluded gains from the sale of a principal residence within the preceding two years.

The first reader will not be subject to income (capital gains) tax on the sale of her home to her daughter, assuming she owned and used the home as her principal residence for at least two out of the five years preceding the date of sale in July.

The second reader will not benefit from the tax exclusion unless she delays the sale until at least two years after the date in 2002 when she resumed occupying the New York house as her principal residence.

For detailed information, check IRS Publication 523, "Selling Your Home."

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