TAX RULES FOR THE SALE OF PRINCIPAL RESIDENCE AND VACATION HOME – TAX PLANNING OPPORTUNITES FOR SNOWBIRDS UPON SALE OF A VACATION HOME OR SECOND HOME IN FLORIDA OR ARIZONA
The 1997 Tax Act has created some tax planning opportunities for individuals who own second homes or luxury vacation homes, such as a Florida second home or Arizona second home, by simplifying the tax rules for selling a principal residence. Basically,under the new rules, married couples can exclude up to $500,000 and individuals can exclude up to $250,000 of capital gain from the sale of their principal residence every two years. The 1997 Tax Act eliminated certain prior restrictions, including the rollover and replacement rule and the over 55 only one time exemption rule.
- There is no longer a requirement that home sale proceeds be reinvested in another residence. Accordingly, you can sell a principal residence, realize tax-free gain and spend the proceeds or invest them as you wish.
- Further, taxpayers need not be over age 55 in order to take advantage of the new exclusion rules, nor is the gain relief rule restricted to just one sale of a principal residence. Accordingly, to the extent of the $250,000 limitation, an individual may buy and sell a new principal residence every two years without recognizing gain on the sale of any such residence. For married couples the gain exclusion is $500,000!
- In order to qualify for the home sale tax gain exclusion rules the home must be:
- owned and occupied by the taxpayer for at least two of the five years prior to the sale,
- as the taxpayer’s principal residence.
- A taxpayer’s principal residence is typically where he dwells most of the time, has mail delivered, registers to vote and has a driver’s license.
- A taxpayer may have only one principal residence at a time.
- The ownership rule applies to married couples even if only one of the spouses holds title to the residence provided both spouses meet the two-year principal residence occupancy rule.
PLANNING OPPORTUNITIES: The new rules have opened up many planning opportunities formerly not available.
- For example, many couples are taking advantage of the new tax law to buy “fixer-uppers”, live in them while they are working on them for the minimum two-year holding requirement, and then selling the home without realizing any gain. They are finding the new rules to be a great way to earn a substantial tax-free income.
- Further, the new tax law greatly benefits the “empty nesters” who no longer need the large home but did not meet the over 55-age requirement under the old rules. Under the new rules the empty nesters can “trade down” their personal residence and buy a second home or other income property with the excess proceeds they do not reinvest in their new principal residence.
- Finally, the new tax law also offers some great planning opportunities for the second home or vacation homes, such as those owned by the Ohio “Snowbirds” who flock to Florida, Arizona and other warm climate states each winter. Under the old tax law there were no tax exclusions or exemptions available for gain from the sale of second homes or vacation homes. Under the new tax law, provided the taxpayer, or one of the spouses, lives in the vacation home as his or her primary residence for at least two of the five years prior to the sale the exclusion applies.
RENTING THE SECOND HOME? Special rules apply if you have been renting the second home for any portion of the year or years prior to the sale. The exclusion may not apply in such case. There are many nuances to the home sale tax rules, and the rules can be different depending on your individual circumstances. You are encouraged to seek competent tax advice from your tax attorney or accountant to learn how the home sale tax rules apply specifically to your situation
© Article written by Patrica Molloy, Copyright 2005 all rights reserved. Patricia Molloy is a tax attorney and Tucson Realtor with Tucson's Prudential Agegis Realty.
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Disclaimer: The information contained herein is not intended as legal or tax advice, but rather is for informational purposes only. |
