IRS Changes Capital Gain Exclusion on Home Sales Beginning January 1

Article by BPBS attorney Joseph Jaap, 513 533-2037

Last July, shortly before the upheaval in the housing and credit markets, Congress passed the Housing and Economic Recovery Act of 2008. Before this recent change in tax laws, a taxpayer selling a home could exclude up to $250,000 of home sale profits ($500,000 if filing jointly) provided the taxpayer physically lived in the home for 2 of the previous 5 years and satisfied other requirements.

However, under the new law, effective for any sale of a taxpayer’s residence on or after January 1, 2009, the prior Capital Gain Exclusion has been replaced with a ratio to determine the amount of capital gains profits that the taxpayer is allowed to exclude.

The new Capital Gains Exclusion formula is not an all-or-nothing proposition. The ratio depends on how many of the previous 5 years the taxpayer has occupied the home, along with other IRS requirements and regulations. For example if you have lived in the home for 3 of the last 5 years, then the capital gain exclusion would only be 3/5, or 60%. Under the old formula, if you had lived in the home for more than 2 of the last 5 years, you would have received a 100% exclusion.

If you are one of the lucky few who are able to sell your home before December 31, then the old tax rules apply. But if you will be selling your home in 2009 or later, then you should talk to your tax professional to find out how these changes might affect you and your taxes.

If you have any questions about the changes to the capital gains exemption, or if we can assist with any real estate sales or purchases that you are planning, or if you have other real estate needs to discuss, please contact your BPBS attorney.