Military Officer - April 2006 - (Page 36)

financialforum Home Sale Savvy How much do you know about taxes that apply to home sales? Phil Dyer, CFP, explains three criteria that can save taxpayers big bucks — if you meet them. M Tax Assistance On the Web ■ IRS Publication 523 is the primary source for determining tax treatment for home sales. You can download the publication at www.irs.gov. any people remember the pre1997 rules that required taxpayers to purchase a more expensive home within two years of the sale of a primary residence to defer capital gains. After age 55, taxpayers could downsize and receive a one-time capital gain exclusion of up to $125,000. The Taxpayer Relief Act of 1997 signiﬁcantly changed primary residence tax treatment, making it potentially much more beneﬁcial for taxpayers. The new rules allow for an exclusion from income taxes on up to $500,000 in gain on the sale of a personal residence if married, ﬁling jointly and up to $250,000 for single ﬁlers under Internal Revenue Code Section 121. To qualify for this exclusion, taxpayers must meet these requirements: ■ Ownership. You (or your spouse, if married) must have owned the house for at least two of the previous ﬁve years. ■ Use. The home must have been used as the primary residence for two out of the previous ﬁve years. If you are married, both of you must meet this requirement. If one spouse does not, the exclusion is only $250,000. Servicemembers who meet the ownership test above may suspend the use requirement for up to 10 years if they are on qualiﬁed, ofﬁcial, extended duty for 90 days or more and are serving more than 50 miles from the primary residence or are living in government housing. IRS Publication 3, The Armed Forces’ Tax Guide (pages 11-12), explains this provision in detail. ■ Frequency. You may only use this exclu- sion every two years. If one spouse has sold a primary residence within the past two years, the exclusion is limited to $250,000. These rules turn the primary residence back into a powerful investment tool, particularly in areas with significant price appreciation. For taxpayers who don’t meet all requirements but sell the primary residence because of job relocation, health issues, or unforeseen circumstances, a reduced exclusion might be available. Suppose the Smiths meet all requirements. They bought their home in 1985 for $200,000 and have made $50,000 in improvements, so their cost basis is now $250,000. They sell the home for $800,000, paying a 6 percent real estate commission ($48,000) and incurring $15,000 in ﬁx-up and miscellaneous expenses, so their ﬁnal effective sales price (sales price less selling costs) is $737,000. Their gain on the sale, then, is $737,000 minus $250,000 (basis), or $487,000. Because they are married, ﬁling jointly, and meet all requirements, they can exclude the entire gain from income taxes. A home must be a primary residence to qualify for this valuable exclusion. Vacation homes and rental properties do not qualify under this provision. MO — Former Army Capt. Phil Dyer, CFP, is deputy director for ﬁnancial education, Beneﬁts Information. For ﬁnancial advice, members can contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.moaa.org /garrett, or visit www.moaa.org/ﬁnancialcenter for other resources. PHOTO: GREG SCHALER 36 MILITARY OFFICER APRIL 2006 http://www.irs.gov http://www.moaa.org/garrett http://www.moaa.org/finanicalcenter http://www.moaa.org/garrett

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Military Officer - April 2006 Contents From the Editor President’s Page Your Views MOAA Directory Rapid Fire Washington Scene Financial Forum Ask the Doctor Chapter Activities Lap of Luxury Magic Carpet of the Rails Blue Ridge Wonderland Salud, Santé, Cin Cin! Cover Story: Wounded Warriors On Duty MOAA Scholarship Donors MOAA Member Services Pages of History Information Exchange Member Books MOAA Calendar Advertising Index Sounding Taps Encore

Military Officer - April 2006

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