Real Estate & Taxes:

Tax Relief on a Home Sale

The enactment of the 1997 Taxpayer Relief Act did a world of good for homeowners when it comes to tax breaks. If your client sold their house after May 6, 1997, they may be eligible to exclude up $250,000 if he/she is single or up to $500,000 if they are married of their capital gain on the sale of their house. In order to be able to claim the entire exclusion, your client must have owned and resided in their home for at least two years of the last five years prior to the sale of the residence. If eligible for the exclusion, they may claim it once every two years.

If your client sold their home because of a change in employment, their health, or some other unforeseen circumstance, they may still be eligible to claim a partial exclusion of capital gains even if your client didn't live in their home for a total of two years of the last five before the sale. The portion of the partial exclusion your client is entitled to is calculated based on how long they owned and live in the home. Nursing home residents are only required to have lived in their home for one year in order to be able to claim the full exclusion. In addition to the lessened amount of time that they have had to spend living in the home to be eligible, the time spent in the nursing home also counts as time spent living in their home. Therefore, if a person lived in his home for one year then lived in a nursing home for three years prior to the sale of his/her home, he/she would be entitled to the entire exclusion amount of $250,000 in capital gain.

Even though these exclusion amounts are rather large and your client is probably unlikely to have to worry about owing capital gains from the sale of their house, it is still in their best interest to keep records regarding the amount of money they have spent making improvements on their home. This is because your client can add these amounts to the original purchase price of their home when they sell it. When your client sells their house, they are required to report the selling price of their home and the amount of money your client spent on its improvements on Schedule D, Capital Gains and Losses. In order to prove the amount they have spent in improvements, they will need to have kept all their receipts for improvements. Keep in mind, only the expenses incurred for improvements to your client's house can be added to the value of thier home, not expenses incurred for the maintenance and repairs. This means that while the costs for repainting or repairing a door cannot be added to the value of their home, costs for remodeling or adding on a room can.