I have owned my current home (and the 40 acres of adjacent land) for over 30 years. My plan is to sell sometime in 2022 or 2023. Do I need to buy a more expensive home to keep the gain from being taxable?
— JI, email
With the housing market "heating up" faster than our weather, it is an attractive option to explore selling your primary residence (including land) at a significant profit. However, the "rollover" rule is no longer in play. That provision has been replaced with a LARGE exclusion of gain on the sale of a personal residence. Note: the gain on sale exclusion for a home can include land if the land was not used for income-producing activities such as farming, ranching, grazing, etc. The maximum exclusion of gain figures are $250,000 (for Single, Head of Household or Married Filing Separately) and $500,000 (Married Filing Jointly). The IRS Eligibility Test must be passed to take the full exclusion. Fail the test and you may qualify for a partial exclusion of gain. Publication 523, Selling Your Home, can be accessed at our favorite website at this time of the year (www.irs.gov).
You can exclude ALL of the gain from a home sale if you meet the ROLE (i.e., Residence, Ownership, Last 2 years, Exclusion) requirements. Namely: Residence is your principal residence; Ownership and living in the home meets the "at least 2 of the last 5 years" criteria; Last two years – prior to the date you sold the home – do not include an exclusion for a home-sale profit; Exclusion of gain is less than $250,000 (or $500,000 for married filing jointly).
A PARTIAL exclusion of gain is allowed if the main reason for your home sale involves a change in workplace location, a health issue or an unforeseeable event (e.g., house destroyed by a natural disaster, death of a spouse, significant change in one's employment status). A worksheet on page 7 of Publication 523 (cited above) provides a helpful template for this computation.
Determining the amount of gain starts with the AMOUNT REALIZED — selling price reduced by selling expenses such as sales commission paid to a real estate agent, advertising costs, legal fees, mortgage points or other loan charges paid on behalf of the buyer and other charges tied to the home-sale activity. Next subtract the ADJUSTED BASIS of the home, which calls for "number crunching" and includes: original price paid for the property + closing costs and settlement fees + qualifying improvements made to the property such as additions to the home, new HVAC system, grounds enhancements, internal renovations and many other items. Do NOT include personal property (e.g., furniture, appliances) even if it is part of the sale. Page 9 of Publication 523 provides a very helpful checklist.