Tax Breaks for Home Sellers
During difficult economic times and faced with a soft real estate market, home sellers fortunate enough to eke out a profit want to protect their meager gains by avoiding taxation whenever possible. Those less fortunate who were forced into foreclosures or short sales want to escape any tax consequences of debt forgiveness for money still owed after their homes are sold or foreclosed.
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Qualified Principal Residence Exclusion
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Home sellers might ordinarily have to pay a capital gains tax of 25 percent on net gains if not for the passage of the Taxpayer Relief Act of 1997. Today, capital gains on home sales are sheltered up to $250,000 for single filers and $500,000 for married couples providing they have lived in their home as their principal residence for at least two of the five years preceding the sale. This is not a lifetime exemption. It applies each time a homeowner sells his main home as long as he meets the two out of five year rule.
Mortgage Debt Forgiveness Exclusion
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Under normal circumstances, if a lender agrees to cancel or forgive a portion of a borrower's obligation, that amount is treated as additional ordinary income to the debtor and subject to taxation. However, under the Mortgage Forgiveness Debt Relief Act of 1997, mortgage debt forgiveness up to $2 million or $1 million if married and filing separate returns can be excluded from income through 2012. Examples of qualifying transactions are restructured home loans, short sales and foreclosures. This federal exclusion is not available for borrowers who are residents of "non-recourse" states, which prohibit lenders from pursuing a borrower's personal assets beyond the collateral for any remaining loan balance.
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Second Home Capital Gains Exclusion
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Because a second home doesn't qualify as a principal residence, many vacation home owners are concerned about the tax bite on the sale of that property. Second homes can become principal residences simply by living in them 183 days or more per year for two years out of the five years before the sale. However, a portion of the capital gains on the sale of a second home converted to a principal residence after 1998 is taxable based on the percentage of the period from January 1, 1999, to the date of sale that the house remained a second home.
Depreciation Recapture Exemption
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Homeowners who run a business from home or have rented out their homes can take depreciation deductions for property wear and tear. The IRS says those depreciation deductions are treated as a reduction of cost "basis," meaning their home's purchase price is reduced by those deductions. When the home is later sold, the portion of the gain that is attributable to depreciation after May 6, 1997, is not sheltered under the principal resident exclusion rule and is taxable at the 25 percent capital gains rate. Depreciation gains for earlier periods qualify for the capital gains resident exemption.
Moving Expense Deduction
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In good times and in bad, people sell their homes seeking better opportunities in other locations. Employees being transferred by their companies usually have most of their moving expenses paid or reimbursed, but moving can be very expensive for folks changing jobs on their own nickel. In recognition of the economic benefits of a mobile workforce and a healthy real estate market, the tax code permits the deduction of moving expenses for relocations of at least 50 miles. Eligible costs can include family travel and lodging expenses, real estate commissions and attorney's fees, moving and storage charges and a 2011 mileage deduction of 16.519 cents per mile to drive the family vehicles to the new address.
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References
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