Generous Tax Code Exclusion for Sellers?

(Originally published December 2010).

Sellers! I know what you're going through. It is a buyer's market extraordinaire, you're worried about getting a good sale price, you hope the home you purchase next won't drop in value, and let's not even think about closing costs and taxes! Many of you have just decided not to sell your home.

I am not a tax lawyer, but before you decide to stay put, or move and rent out your home, carefully consider this little known loophole.

First, you must realize that the home sale exclusion is one of the most generous tax breaks in the tax code. As it stands, if you have owned a home and used it as a primary residence for 24 months out of the last 60 months, all the gain is tax free upon sale. So if you made $50,000 on the sale of your home and your tax bracket is 27% you wouldn't have to pay $13,500 capital gain tax.

Second, it is easy to use the home sale exclusion even if you don't meet the two year test. If you have to move because of an unforeseen circumstance before being in the house for two years, you may still get a PARTIAL tax break.

Third, these unforeseen circumstances have broad definitions. IRS Publication 523 states:

"The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved."

You may qualify for a reduced maximum exclusion if you are: fired; promoted; demoted; changed jobs; became self-employed; or even had twins.

So that's all fine and dandy you're thinking, but so what? Well, what if you started a business, changed your business or closed your business? What if this was a home-based business? Did you know there are low cost and even no cost home-based businesses out there? The fact is any change in employment arguably affects your reasonable basic living expenses.

And if you can demonstrate that this unforeseen circumstance impacted your reasonable basic living expenses, guess what- you get a partial tax break.