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Income Gain Exclusions – The Scoop on Code Sec. 121.

By John Dietz - Email Editor

Date : August 12, 2008

Dear Valued Reader,

This article is about the exclusion of gains from the personal residence. It is something that all people who own property in the US should know about. The issue involves income that was previously excluded from tax (tax-free), which may now be taxable beginning in January 1, 2009. It sounds bleak for taxation, but if you follow along, there are solutions.

(a) Exclusion

Gross income shall not include gain from the sale or exchange of
property if, during the 5-year period ending on the date of the
sale or exchange, such property has been owned and used by the
taxpayer as the taxpayer's principal residence for periods
aggregating 2 years or more.

(b) Limitations

(1) In general

The amount of gain excluded from gross income under subsection
(a) with respect to any sale or exchange shall not exceed $250,000.

(2) Special rules for joint returns

In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property -

(A) $500,000 Limitation for certain joint returns Paragraph (1) shall be applied by substituting ''$500,000'' for ''$250,000'' if -

(i) either spouse meets the ownership requirements of subsection

(a) with respect to such property;

(ii) both spouses meet the use requirements of subsection

(a) with respect to such property; and

(iii) neither spouse is ineligible for the benefits of
subsection

(a) with respect to such property by reason of paragraph (3).

As you can see there is much more to this bill. We will discuss the changes in this newsletter and will continue with our solutions in upcoming newsletters. The changes have a dramatic affect upon property owners.

The bill provides provisions to reduce the amount of tax-free exclusions that are available to a taxpayer upon the sale of their personal residence. This bill applies to more than the primary residence; vacation homes, the second residence, rental and investment property all are included and now must fall into personal use within the allotted aggregate time to qualify for the income gain reduction on a pro rata basis. This means you cannot flip a second property into a residence, move in, sell it thirty days later, and expect the exclusion.

Only one sale every two years can qualify for any tax exclusion and the property must be lived in for an aggregate of 24 months in the last 60 months.

The period that counts as non-qualified does not count for any exclusion. Simply, if the property was rented for two and a half years and owned for two and half years and the gained income was $400,000 only 50% or $200,000 would count for the tax-free gain and the other $200,000 would be taxable gain.

There is a lot more to this bill. There is a new, first time homebuyer tax credit, a new tax deduction for non itemizer homeowners, a low-income housing tax credit, tax-exempt housing bonds are subject to state taxation, a potential state bond relief for reissuing mortgages to subprime lenders, REIT reforms and implications for the 2004 Jobs Creation Act.

If you have specific questions or concerns you would like the answers to, post them HERE on the Asset Protection Forum. We would love to hear your comments.

Ronald Reagan on taxation in his state in the State of the Union Message February 1981:

The taxing power of the government must be used to provide legitimate government purposes. It must be not be used to regulate the economy or bring about social change. We’ve tried that, and surely it doesn’t work!

I think that President Reagan’s point certainly opens the door for US citizens to consider alternatives.

Until next time,
 
John

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