Tax Tips
Poor Health and Your Home: The Tax Connection- October 2006
Richard Scrivanich - Partner
If you own your own home, you're probably familiar with the special tax rule that lets you exclude the gain from the sale of your primary residence. To take advantage of this exclusion, the IRS requires you to have lived in your home for at least two years within the five years prior to sale date. Married couples that file a joint return may exclude $500,000, and individual taxpayers get a $250,000 exclusion.
Another, lesser known, exclusion
There are other, lesser exclusions if you sell your house for "too soon" because of unforeseen circumstances, divorce, or financial hardships.
But a lesser-known exclusion-the health exclusion-may be one of your strongest cases for getting an "early" exclusion. The exclusion amount is computed as a percentage of the regular exclusion rate (either the $500,000 or $250,000 rates mentioned above), expressed as the number of months you owned your home as your primary residence divided by 24 months.
Example
Assume that a homeowner purchased his home January 10, 2006 for $300,000. He sells his home on June 30, 2006. He owned the house and lived in it as his primary residence for six months. If the sale was precipitated by a bona fide health reason, he will be able to exclude up to $125,000 in gain on a joint return (one-quarter of the $500,000 exclusion). Note that an additional adjustment may have to be made if sells another primary residence (with gain) within two years of this sale.
By IRS definition, your home is sold for "health" reasons if:
…Your primary reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual (such as your child). Health is considered to be the reason you sold your home if…a doctor recommends a change of residence.
It would be prudent to obtain a doctor's recommendation, in writing, to help substantiate that the sale was brought on by health reasons for you or for a member of your family.
If you have any questions regarding this topic or any other tax matter, please feel free to call me at (562) 698-9891.
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