Tax Attic: Selling personal residence for profit

This week, let’s go over the rules in place that regulate the situation when a taxpayer sells a personal residence at a profit and has occupied and owned that residence for less than two years out of the last five years. The general rule states that when a taxpayer has occupied and owned his residence for at least two years out of the last five years, up to $250,000 of profit for a single person and $500,000 for a jointly filing couple is excludable from income.  The specific less than/more than rules are very involved.  I have a large amount of reference material when it comes to these situations and have attended many seminars where this topic was covered in depth.  Going back in history tells us that previous to May 1997, the rules were much more restrictive.  The profit on a sale back then could be excluded only once in a lifetime.  The maximum amount that could be excluded was $125,000 for a single and $250,000 for a couple. In order to not pay tax in any other situation required the taxpayer to re-invest the gross proceeds of the sale in another personal residence.  This was perceived as discriminating against seniors who might have lived long enough to have retired and sold their lifetime home; subsequently purchased a retirement home and now, for age reasons, are selling that succeeding home. The profit on this sale was totally taxable.  Taxpayers in the construction business were also forced by the tax rules to keep building bigger and more expensive homes.  Both groups were given a larger and more beneficial tax break that I have seen come in handy over the years.

What happens now, however, if the taxpayers did not own and occupy the principal residence for the full two years out of the last five? Actually, the 1997 law itself, when passed, included provisions that allow taxpayers to exclude a partial amount if the sale took place because of a change of employment, a change in health, or because of unforeseen circumstances.   Since passage, the Internal Revenue Service has issued quite a few rulings that define “unforeseen circumstances” quite liberally.  So, in other words, just because a taxpayer has not owned and/or occupied a home for the required two year out of five period, all of the profit may still not be taxable.  The profit or some part of it may still qualify to be excluded. The change of employment reason is probably the one we encounter most frequently.  For example, joint taxpayers buy a home in the Rockford area, having been transferred into Michigan from Colorado.  Twelve months later, the husband’s employer decides to further transfer the husband to North Carolina.  Due to the change of employment provision, 12/24 months equals 50%.  $500,000 times 50% equals $250,000.  Up to a total of $250,000 of profit would still be excludable from the taxpayers’ income even though they only owned and occupied their residence for one year.  It’s important to note that the exclusion is pro-rated and not the profit itself. In our example, 50% of the exclusion is applied against 100% of the profit.  Tax laws are not usually quite so taxpayer friendly.  Of course, there are rules for distance that must be met to qualify for the employment transfer exclusion.  For example, the taxpayer couldn’t have purchased a home on Silver Lake and then sold that home to buy one on the Boulder Creek Golf Course even if the employer did transfer his employment position from say Rockford to Grand Rapids.  The transferring distance must be at least 50 miles. Next week, we can go over a few of the “unforeseen circumstances” that will allow a nice tax break.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at