Taxes On Sale Of Home Not Always Avoidable

Normally, the tax on the gain from the sale of a principal residence may be avoided or postponed by acquiring a new residence within 48 months.

In most cases, a taxpayer must buy or build a new home and use it as a principal residence within two years before or two years after selling.

Different rules may apply to military personnel.

Most significantly, to take advantage of this extremely beneficial provision, the cost of the replacement home must equal or exceed the adjusted selling price of the old home.

If a taxpayer does not replace the residence on time, the entire gain will be taxed as a capital gain.

Correspondingly, if the cost of the new residence is less than the adjusted sales price of the former home, the unspent proceeds will be subject to tax.

However, tax breaks are not available in the following situations:

More than one residence. You rent your principal residence and own a secondary residence.

New residence sold before old. If a new residence is bought and sold before the old residence is sold, the first sale will not qualify. Accordingly, the entire gain on the sale of the new residence will be taxed.

More than one rollover. If more than one principal residence is acquired within the rollover period, only the last such residence so used is considered a new home.

However, the tax break applies to more than one sale within the rollover period if the move is job-related and the moving expenses are deductible.

Ownership stake in a new residence held by another. There are no tax benefits if the proceeds from the sale of the old home are reinvested in a new home to which another party, such as the taxpayer’s child, holds title.