C O A L I T I O N Corner Home Sale Capital Gains Exclusion Coalition Corner: Business training tools for HR staff, real estate licensees and other service professionals in the relocation and real estate industries © 2005, Employee Relocation Council/Worldwide ERC ® Coalition

C O A L I T I O N Corner Program Objectives This program supplements a monthly editorial feature in ERC’s Mobility magazine In this segment, users will learn about: –Various changes to the 1997 tax law on capital gains exclusions –How taxpayers qualify for exclusions –Satisfying the “two-year” rule –Special rules and exclusions –Home office facts

C O A L I T I O N Corner Changes to the 1997 Law New law has numerous requirements and can be complex in operation Replaces earlier “roll-over” gain rules Eliminated capital gains tax up to $250,000 ($500,000 for married couples filing a joint return)

C O A L I T I O N Corner Qualifying Taxpayer must have owned and used the house as his or her principal residence for at least two of the five years immediately preceding its sale Periods of use do not have to be continuous

C O A L I T I O N Corner The House as the Principal Residence “Principal residence” is ordinarily the residence that the taxpayer uses the majority of the year If the taxpayer regularly resides in more than one house, other circumstances may also be relevant to determine the “principal” residence To satisfy the two-year use rule, new regulations define “use” to require actual occupancy, except for short, temporary absences (such as seasonal vacations)

C O A L I T I O N Corner Expatriate Employees Employees assigned abroad usually retain the U.S. residence and intend to return Their period of absence is not counted toward meeting the two-out-of-five years’ use requirement, so they may owe tax on the gain if they sell the home when they return Overseas more than three years, but less than five. The exclusion may be partially lost unless the employee reoccupies long enough to make up the shortfall

C O A L I T I O N Corner Exclusion Available Every Two Years If the taxpayer owns or buys another house, and uses it as his or her principal residence, gain up to the $250K/$500K limits on the eventual sale of that house may also be excluded, provided that it is at least two years after the sale of the first house The exclusion may be claimed every time the taxpayer sells a principal residence as long as two years elapse between sales

C O A L I T I O N Corner Can’t Meet Two-Year Rules? Can claim a partial exclusion if change in place of employment, health, or unforeseen circumstances Examples of moves that will qualify: –one qualifying for deduction of moving expenses, –recommended by a physician –due to natural disaster –divorce –loss of job

C O A L I T I O N Corner Couples and Joint Owners Married taxpayers must file a joint return to claim the $500,000 exclusion, but only one of them needs to meet the two-year ownership requirement. Taxpayers who jointly own property, married or not, may each exclude up to $250,000 of gain on their individual returns even if there is no joint return filed

C O A L I T I O N Corner Home Offices Good news! Gain on sale no longer allocated to any business use of the property as long as the business and residential uses are within the same dwelling unit. But remember that gain is taxable to the extent of depreciation taken after May 6, 1997 (effective date of statute), or if part of property not used as residence is physically separate/separate dwelling unit.

C O A L I T I O N Corner Reporting of Sale If all of the gain on sale of a home is excludable, the IRS does not require reporting on the tax return Form 1099-S for real estate transactions is required, unless a number of information collection/documentation rules are met

C O A L I T I O N Corner In Conclusion Remember to consider these elements: Qualifying for the exclusion Verifying the Use of a House as the Principal Residence The Expatriate Employee Issue (two out of five years) Frequency of Exclusion (Every Two Years) Partial Exclusion for Special Circumstances Special Rules for Couples and Joint Owners Home Office Exclusion Reporting of Sale Not Required, But 1099-S May Be