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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10105
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Can I take the 2 year exemption as a home owner to avoid the

Customer Question

Can I take the 2 year exemption as a home owner to avoid the capital gains tax? We have lived in our home for 25 months, before that it was rented full time. My husband and I are both over 65 yrs. old.
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

Hi,

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There IS an exclusion of he gain ... but because the home was rented there is a Modified (less than complete) exclusion o the gain

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let me get the regs for you ... just a second

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Expert:  Lane replied 1 year ago.

Normally hen homeowners sell their main home, they exclude $500,000 of the capital gains on sale from income tax. T

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But the 2008 Housing assistance act modified the rules.

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Now, the amount of profits from the sale of a house that can be excluded is based on the percentage of time when the house was used as a primary residence.

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It works like this...

Expert:  Lane replied 1 year ago.

If the property wasn't used used as a primary residence during the entire five-year period (of the"2 out of five test" ... living in the home in any 24 months out of the last five years before sale) the you have a period of what IRS calls "disqualifying use."

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There's a ratio that's used in the relatively new law to show hoe much of the gain cannot be excluded (must be reported as capital gain)

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The portion of capital gains that cannot be excluded is determined by the following ratio:

Period of non-qualifying use / Period of ownership

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So let' say that you bought the home in 2000, rented for 5 years, but then (as you mention DO qualify for under the principal residence test)

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The amount of the gain that you would have to include as TAXABLE gain would be 5/15 = 33%

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So let 's say that you had a gain of 100,000 on your sale ... you would have to include 33,000 as a capital gain on your taxes for the year of sale

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Long-term gains and qualified dividends taxed at

  • 0% if taxable income falls in the 10% or 15% marginal tax brackets
  • 15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
  • 20% if taxable income falls in the 39.6% marginal tax bracket

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Please let me know what questions you may have from here

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Lane

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If this HAS helped, and you If you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Lane

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Expert:  Lane replied 1 year ago.

Hi,

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I'm just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Lane

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