Tax problems? No way! Gain up to $250,000 is completely tax free. (Couples can exclude a $500,000 gain.) For most people this is true. Tax issues when selling your home are minor. For most people.
What if your gain is larger than the exclusion? Or you have only owned it for a short time? What happens for the newly married (or divorced)? What if you turned the home into a rental a couple of years ago? Or ran a business in the home?
The rules are simple. But, if you have a "what-if case we need to talk before you sell. You could pay a big tax because you missed a detail or sold two weeks early.
3 Tests. Pass 3 simple tests to earn the $250,000 exclusion:
- Ownership In the 5 years preceding the sale you must have owned the home for at least 2 years.
- Principal Residence In the 5 years prior to sale it must be your principal residence for at least 2 years.
- Prior Exclusion It must be at least 2 years since you claimed such an exclusion.
All Or Nothing. Miss any test by one day - lose the exclusion.
Special Exceptions. Each rule allows for job changes, medical issues, or unforeseen circumstances. If you qualify you can get a portion of the exclusion that depends on how much of the 2 years in each test you can meet.
Exclusion For People, Not For Homes. For a couple, if each spouse passes the tests, their return shows a $500,000 exclusion. In fact, there's a case on record of four roommates owning a home jointly. Each of the four is allowed to claim a $250,000 exclusion when the home is sold.
The "What Ifs". Combinations arise that are not so simple.
Ownership. What if you have not owned for two full years? Without the Special Exception your gain will be taxed. Spouses get a special rule - both pass the test if either does. Recent marriages or prenuptial agreements are ignored.
Principal Residence. Spouses have no special rules. If newlyweds live in a home already used by one spouse, the spouse who moves into the home must live there for two years. In some cases couples sell, but only one spouse gets the exclusion. There is an exception for divorces - if the home is held in both names after the divorce, but one spouse must move out, that spouse is treated as if still living there.
Proving Residence. Your home is not a mailing address, it's where you live. In tough cases IRS looks at utility bills, voter records, car registration, work place, and the like. If you sell with barely two years under your belt, you might need records to verify you occupied the property. Receipts from moving companies, utility "turn-on" notices or other signals of when you move into or move out of the property would be helpful.
Combinations. Each test is separate. The first two tests cover a 5-year period. After living in a home for years, you might turn it into a rental. Up to 3 years later you could sell and still pass Test 2 to earn the exclusion.
Periods of time need not be the same. IRS gives an example of a person who buys the property in which they had rented for years. Before long they move out and rent to a tenant of their own. Two years later they sell the property. They pass Test 1 - two years of owning. For Test 2 the 5-year period still contains 2 years in which they lived there! Claim the exclusion.
Larger Gains. What if your gain is even larger than the exclusion? First let me say to you - Congratulations! Second, you must review your basis (cost) carefully. I will help, of course. We need to be certain you account for all additional costs for improvements you adc)ed after your original purchase.
Business Use. What if you ran a business from the home or rented it out for a time? You still get the exclusion. The only hitch is you may not exclude any gain from the depreciation you deducted during the time in question.
The Message. Your head should be spinning from all the information. And, I didn't tell you everything! My point is simple. If you sold your home of many years for a modest profit, there is no problem. For any case with the smallest doubt, call me before you sell. Your call could save you thousands of dollars!
Vehicle Donations: The Full Story
The ad goes: "Donate your old car to us - you help the needy and get a valuable tax deduction!" Let's take a fresh look at donating cars, boats, or motor homes. Tax laws changed for 2005. IRS has published new rules for claiming the deductions.
Contribution vs. Savings. Many people seem to think this is some sort of game to make a profit at IRS expense. Guess again. Contributions are about giving. In fact, tax law does not define "contribution". The courts have described a contribution as "freely given, with no expectation of return."
Fairness and logic say if you give an item worth $100, you have a $100 deduction. If you are in the 25 tax bracket you save $25 on your taxes. This is identical to making a $100 cash contribution to a charity. The net cost of the gift is $75 after taxes, but it is still a gift. Your profit is in your heart, not your wallet.
Valuation Abuses. IRS said many folks claimed far more for vehicles than what they were worth. They showed Congress cases in which a value near $5,000 was claimed on tax returns when the charity got only a few hundred dollars for the vehicle. So Congress changed the law.
Current Law. The new rules apply to cars, boats, motor homes, and aircraft. If you claim more than $500 for your contribution:
- Timely Substantiation from the charity is required, and
- Value claimed may not exceed the gross sales price the charity receives from the sale.
Substantiation from a charity must identify the charity, the giver, and the item completely. It must give Tax I.D. Numbers for you and the charity, VIN for a vehicle (and equivalent identification for boats or aircraft).
"Timely" generally means within 30 days of the later of the contribution or the charity's disposition of the item. There's a special exception for 2005 - gifts through September 1 are OK if substantiation is received by October 1.
Value. The substantiation shows the amount of the gross sale proceeds from selling the item. Generally this limits your deduction. Suppose you donate a vehicle that often sells on car lots for $2,000. The charity sells it at a wholesale auction for $800. Your deduction is only $800.
This may sound wrong or unfair. But, it is the law. Moreover, charities rarely see these donated vehicles. An agent with experience in auto sales does all the work for them. Pick-up, paperwork, sale - everything. The charity gets a check reduced by these costs and by the agent's fee. If the car sells for $800 at the wholesale auction, the charity probably collects about $500. Imagine if the law only let you deduct the net proceeds!
Form 1098-C was released by IRS. Most charities will be using the form to report these cases. Keep the Form! I'll need to see it. If you lose it your contribution is limited to $500!
Not a Normal Sale by Charity. IRS gives 3 cases in which the charity does not simply sell the item to a third party. They allow for the charity (1) making use of the vehicle in a significant way to further their charitable function, (2) selling well below market value to a needy individual, or (3) making significant improvements to the vehicle before sale. The charity will mark a check box on Form 1098-C to signal such a case. These are quite rare.
In such cases, there will be no statement of sales proceeds. You must justify a value for the vehicle. Statements about its condition, photos, or evidence of similar sales would be helpful. IRS points out clearly that if using a "pricing guide" to set values, the guide must show prices for a similar model (age, mileage, condition, warranty, etc.) sold in the same general area. If the guide distinguishes between private party, trade-in, and dealer retail price, IRS will accept the private party price, but not the dealer retail price.
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