Two personal tax questions for today’s forum

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1. I sold my primary residence this year in June. We are currently renting now. When or must I purchase another primary residence to avoid capital gains? What improvements are allowed to calculate the cost basis of primary home before we sold and what is the capital gains threshold that can be excluded? $500k married? Is this CG exemption only for federal taxes or are there state benefits too?
2. My daughter was a dependent college student for six months this year then on her own July 1. How do we both handle splitting the year on our tax returns as to dependency?

thank you

[JohnS_CPA · Accepted solution]

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.

You do not need to purchase another home to avoid capital gain.

Home improvement costs (which are more or less permanent changes to the house and not the same as repairs and maintenance) can be used to increase your basis and reduce your gain. Improvements like a new roof, and addition, driveway, sidewalk will increase your basis. Items that are necessary to keep you home in good condition but don't prolong life do not increase basis. Examples include painting or fixing leaks. See the link to publication 523 above if you require more detail.

Regarding your daughter:

 The IRS defines a dependent as a qualifying child (under age 19 or under 24 if a full-time student, or any age if permanently and totally disabled) or a qualifying relative.

•   A qualifying dependent can have income but cannot provide more than half of their own annual support.

•   A taxpayer can’t claim a dependent if they are a dependent themselves, if the dependent files a joint tax return with a spouse (except in certain cases), or is claimed as a dependent on someone else’s tax return.

To be claimed as a dependent a qualifying child must live with you for more than 1/2 of the year.

What qualifies as a full-time student for taxes?

A full-time student for tax purposes is someone who meets the full-time requirements of their school for at least part of the month for five months, which do not have to be consecutive.