Capital Gains Partial Exclusion

[ConnorJ88]

I closed on a home on Jan 14, 2021, and will be closing on the sale of that home on May 25, 2022 (496 days).

I have relocated due to taking a new job (prior employer 6.5mi from home, new employer 99.2mi from home). Upon research, the IRS partial exclusion doesn’t simply provide a formula that I could locate to represent the actual partial exclusion amount.

As I understand, the formula is the following:

- Time lived in home (days): 496

- Time required to live in home under traditional standards (2 years) expressed in days: 730

- Sale price of the home: 249,900

(( 496 / 730 ) X 250,000) = $169,863 (maximum amount of single individual exclusion gains I can claim untaxed).

Is there any confirmation of this formula available, and possibly any resource regarding the ability to claim the loss on items included in the sale that were not originally purchased with the home (i.e. washer/dryer, fridge, blinds, etc.)?

[Mike9241]

your calculation of the exclusion is correct.

the washer/dryer etc could be added to the cost basis but it may not be needed

say:

1)the sales price of the home is $250K

2) selling expenses and closing costs are $X

3) tax basis of the home including closing costs on the purchase are $Y

4) the gain is $250K less ($X + $Y)

the taxable portion of the gain if any would be reduced by the exclusion of about $170K

so if $X and $Y exceed $80K there should be no taxable gain.

you can not take a loss on the sale of your personal residence (this would include appliances, etc )

want more info. read IRS PUB 523 - selling your home

https://www.irs.gov/pub/irs-pdf/p523.pdf 

[TomD8]

A partial home sale tax exclusion is ordinarily limited to the percentage of the two years up to the date of the sale that you owned and occupied the home as your principal residence.  So your proposed calculation should be acceptable to the IRS.

When you calculate your capital gain, you are allowed to include in your cost basis the cost of capital improvements you made to the house, but you cannot include the cost of items (such as appliances) that are not part of the house.  Examples of capital improvements would be a new roof, a room addition, a new central HVAC system, etc.

An old rule of thumb is that, if you can carry it away from the house, it's not a capital improvement.

[ConnorJ88]

So, for confirmation (apologies, wanting to cross every box):

Sale of home (250,000) less the cost to sell (Mortgage of 165,000 + realtor fees + closing) = ~75,000

Since that is below the ~169,000 partial exclusion, the entirety is not taxable, correct?

[TomD8]

Not correct.  Your mortgage balance is NOT a consideration in the calculation of your capital gain.

Capital gain = net sale proceeds minus the adjusted cost basis of the home.  The "adjusted cost basis" is the original cost of the home plus any capital improvements you made to the home.  If part of your sale proceeds were used to pay off a mortgage, that is irrelevant to the calculation.

Example:

Original cost of home = $150,000

Capital improvements made by owner = $40,000

Adjusted cost basis = $190,000

Sale proceeds = $290,000

Capital gain = $100,000

[rjs]

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@ConnorJ88 wrote:

Is there any confirmation of this formula available

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Confirmation of the calculation of the partial exclusion limit is in section B of Worksheet 1 on page 7 of IRS Publication 523, which you can download from the link that Mike9241 posted above.

[NCperson]

this is the way to do it:

Sale of home (250,000) less the cost to sell ($10,000 realtor fees + closing) LESS the original purcahse price.

Since the partial exclusion is $169,000.... as long as you paid more than $71,000 for the home back in early 2021, there is no capital gains tax.

assume cost of home was $75,000

Sale of home (250,000) less orignal purchase price ($75,000)  less cost to sell ($10,000 realtor fees + closing) = $165,000 of gain

As the exlcusion was is $169,000, there is no capital gain tax. 

[kenken_kr]

Hello, I am sure this has been answered many times already but sorry for being not very intelligent and I really need to a clear answer before I make a big big mistake. So please excuse my question here.

I bought my current home in Nov 6th, 2020. I lost my job in March 2022 and have received the Unemployment benefits July 2022. I finally found a job and I need to relocate by October 1, 2022. So I am 35 days short from the two year requirements. I guess I can delay the relocation until October 6th, just to make this calculation simpler. So let's say I've lived in my current home 23 months, and move to a different state which is 400 miles away. Will I need to pay any capital gain taxes? The price I bought my home was $320k and it is on the market for $405k. Thank you in advance for those who take time to help me out!

[DoninGA]

@kenken_kr Since you are going to have a job related move then you will get a partial exclusion.

For simplicity if you sell the residence one month shy of the two year requirement then you will eligible for 23/24 of the exclusion.

If you are single the exclusion is $250,000 or married and your spouse also lived in the home the same amount of time as you, the exclusion is $500,000 .  So if your gain on the home is only $85K you are well within the exclusion amount, either Single or Married.

[kenken_kr]

Thank you so much for your reply! So basically even if I am not meeting that two year requirement, as long as my gain is less than $500,000(I am married and live with my spouse), I don't need to pay or report for my $85K gain for selling my current home, as I am moving for a new job. Thank you for giving me peace of mind 🙂

[Mike9241]

if you get a 1099-S you'll need to report the sale but assuming the exclusion is at least equal to the gain there will be no taxes. if you fail to report the sale in this circumstance the IRS will assume your tax basis is $0 and that the entire proceeds are taxable. that will be accompanied by a bill for taxes penalties and interest. then you'll have to go through the process of following the iRS instructions for how to refute the findings and bill. 

[kenken_kr]

Thank you, will keep that in mind and report to IRS, if I get a 1099-S! 

[ConnorJ88]

Hey @Mike9241 - Follow up here.

I am now filing my taxes, but have noticed that on Pub 523 it states the following:

"If you received a Form 1099-S. If so, you must report the sale on Form 8949 even if you have no taxable gain to report. See Instructions for Form 8949 and Instructions for Schedule D (Form 1040) for more details."

Above that it also states: "your gain that is eligible for exclusion from your income is not to be reported on your tax return. The "Reporting Your Home Sale" section only applies to your non-qualified use gain."

So which is true? I didn't receive a 1099-S at the time of sale, but I contacted the title agency and they stated that they had one on file and would email it to me. IF the entirety of my gain is not considered taxable, then do I need to report the 1099-S as a verification of gain?

Currently, I have the gain listed in my return but the Federal side is not showing that I owe, but state (OK) is showing that I do. If I am able, should I not report the gain in my return given that I am excluded?

[GeorgeM777]

You do need to report the sale of your home.   The section of the IRS Publication you included in your post... "your gain that is eligible for exclusion from your income is not to be reported on your tax return..." only applies if there is a period of non-qualified use.  Non-qualified use is that period of time during which the home you sold was not your primary residence.  

It is also important to report your home sale on your tax return because you can exclude any capital gain--up to the limit--only once every two years.  Thus, your tax return can serve as your evidence as to the last time you excluded a capital gain in connection with the sale of a home.  

@ConnorJ88