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Your Home and Taxes
The ability to itemize your taxes because you own a home is well known. But this may not be as well publicized is the newest relief for homeowners, the tax exclusion for selling a highly appreciated property.
Over the last several years, the cost of buying a home has skyrocketed in many areas. In others, the appreciation in the value of your house has risen more modestly. A problem was developing for owners who sold at even a modest gain. If the capital gains received as part of the sale was not reinvested in within two years, taxes would need to be paid on these gains - unless of course you reinvested the money in a home of equal or greater value. The problem was, the tax owed wasn't forgiven. Instead, the money owed as part of the previous sale was deferred. The exception was for homeowners over 55 years old. For that age group, up to $125,000 could be permanently excluded.
In a rising real estate market, replacement homes of equal or greater value were becoming harder to find. The Tax Relief Act of 1997 fixed this problem. The only caveat was that you live in the home for at least two years prior to the sale. If you did, a single tax payer could permanently exclude up to $250,000 from taxes, with couples allowed to exclude twice that amount.
The law was written with a good deal of flexibility, which is not usually the nature of Internal Revenue Service interpretations. Employment changes, health problems and unforeseen circumstances such as divorce or the need for a larger home because of a marriage for instance, are all considered under the rules.
We won't list all of the provisions of the law here but there are certain things you need to keep in mind. This law applies on the sale of a home after May 7, 1997. Partial exclusions are available but it is up to you and your tax preparer to find them. the two in five rule still applies in many circumstances with the exception of a prolonged stay in the military. Last November, the exclusion for those serving in the military was lengthened to ten years.
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