Tax Tips
Consider the Health Exclusion for Capital Gain - June 2007
Richard Scrivanich - Partner
No matter how old you are, what part of the country you live in or practically anything else about the way you live your life, when health issues impact your well-being, how you work and live are never quite the same again.
According to the National Center for Health Statistics 9 percent of our population is in fair or poor health, and 12 percent currently experience a limit in their activity due to one or more chronic health conditions. With such alarming numbers, it’s no wonder that, for some, paying the mortgage on time may not only be somewhat difficult due to other impending bills, but downright impossible.
Health Exclusion
If you own your own home and sell it, you probably already know that a special tax rule allows you to exclude a gain from the sale of your primary residence. To take advantage of this exclusion, you must live in your home for at least two years within the five years prior to the date of the sale.
Married couples filing a joint return may exclude $500,000, while individual taxpayers may exclude $250,000.
Exceptions to the two-year rule allow you to get a partial benefit of the gain exclusion if you sell your house “too soon” because of unforeseen circumstances, such as divorce or financial hardships. One of these is the “health exclusion.”
What kind of tax break are we talking about? The exclusion amount is a percentage of the regular exclusion rate ($500,000 for joint filers, $250,000 for single filers). To figure this out, take the number of months you owned your most recent home as your primary residence and divide that number by 24 months. Note that an additional adjustment may be necessary if you have taken advantage of the residence sale gain exclusion within two years of this sale.
To benefit from the health exclusion, your primary reason for the sale must be 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” also is considered to be the reason you sold your home if a doctor recommends a change of residence.
Exclusion example
Assume a couple purchased a home January 1, 2005, for $300,000, and sold it on June 30, 2005. They owned the house and lived in it as their primary residence for six months until the husband became ill. If the sale was precipitated by a bona fide health reason, they will be able to exclude up to $125,000 in gain on a join return (25 percent of the $500,000 exclusion).
Proof for the exclusion
If you anticipate using the exclusion, you should 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.
While there are a number of tax breaks due to ill health or some other kind of malady, the “health exclusion” may be one to strongly consider if you or a member of your family is severely affected. Please check with our office for more information.
If you have any questions regarding health exclusion for capital gain or any other tax matter, please feel free to give me a call at (562) 698-9891.
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