Friday, August 27, 2004

Capital Gains Exceptions Finalized

The Internal Revenue Service issued final rules recently that could reduce capital gains taxes for some homeowners. Current rules allow taxpayers to exclude $250,000 in gains for single sellers and $500,000 for married sellers if they have met certain criteria.

Ann vom Eigen, Legislative and Regulatory Counsel for the American Land and Title Association (, reports on her group’s web site, “The IRS has finalized rules for the treatment of taxpayers who do not qualify for the maximum exclusion of capital gains on home sales because they have not owned and used their property as their principal residence for two of the past five years, or have taken an exclusion within the preceding two years. The rules significantly expand the situations under which capital gains exclusions may be taken.”

In essence, if a homeowner found it necessary to move before the two year period, then he or she would owe capital gains taxes on gain under the two floor amounts ($250,000/$500,000).

There have always been exemptions under the code to allow for at least some exemption from taxation if the homeowner had extenuating circumstances, such as a change in place of employment, health or unforeseen circumstances. Under the final rules, “safe harbors” are established for taxpayers to qualify for these exclusions of capital gains taxes.

Unforeseen circumstances have been the most confusing section of the rules, though they point out that the IRS is not heartless when it comes to taxes and hard times. What determined unforeseen circumstances seemed to be considered on a case-by-case basis in the past. Now, the IRS has named an unforeseen circumstance as "an event that the taxpayer could not reasonably have anticipated." In addition, the unforeseen circumstance could affect someone in the household other than the taxpayer, such as the taxpayer’s spouse or other dependent who lives in the house.

Safe harbors under the unforeseen section include, but are not limited to:

A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence.
The cessation of employment as a result of which the individual is eligible for unemployment compensation.
A change in employment or self-employment status that results in the taxpayer’s inability to pay housing costs and reasonable basic living expenses for the taxpayer’s household.
Divorce or legal separation under a decree of divorce or separate maintenance; and
Multiple births resulting from the same pregnancy.

If you find yourself in an “unforeseen circumstance” situation, then you may be in luck, as it were, for your hardship. It means you may be able to pay less taxes or be exempt from taxes altogether. The tax would be calculated based on how long you had lived in the property, among other criteria. Check with your accountant to be sure and you can use the online capital gains calculators below to get started.

Members of the military also receive some final rules on the length of stay test. ATLA also reported that under the military exception, “A taxpayer serving, (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service may elect to suspend the running of the 5 year period for up to 10 years. The exception for members of the Foreign Service and the military is retroactive to May 7, 1997.”


For the full text of the final revisions, visit the Federal Register online at, and search for “page 50302”.

Capital Gains Calculators:
Certified Residential Specialists ( ( (

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