Kelly Bullis: No tax on home sales? Not so fast

Kelly Bullis

Kelly Bullis

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I’ll bet most of you have heard that if you sell your personal residence, as long as you meet the requirements, you do not pay tax on the first $500,000 of gain for married or $250,000 for singles.
Sounds good so far, right! Well, there are a few situations where that may not work out so well.
The most important thing for you to ALWAYS be doing, is keeping a running log of improvements you make to your home from purchase through today. Keep it running every year. When you go to sell your home someday, all the improvements you made during the ownership of that home reduce the potential taxable gain. (If you haven’t been keeping that log up to now, start one, and go through your memory of all major improvements you’ve made in prior years, try to find receipts, etc. to compute the costs of those improvements. Then keep that log up to date from now on.)
Here are a couple scenarios that have ended up surprising some folks, causing them to pay some tax on the sale of their home.
A few years ago, the rules for home sales were different. Instead of a flat zero tax on a certain amount like now, you could “defer” the tax on the sale of a home as long as you purchased a larger home within a short period of time. Problem is, for folks who did that and are still in that home today, their basis on that home is much less than what they paid for it. Why? Because, back then, you reduced the basis of the current home by the gain you deferred on the sale of the previous home. That reduced basis still carries forward to today.
Example: A married couple sold a home in 1985 and had a $300,000 gain deferred by purchasing a new home for $450,000. Their basis on that new home is the purchase price of $450,000 less the deferred gain of $300,000. So, they paid $450,000 for their current home, but their tax basis is only $150,000. Ouch! If they sold that home for $800,000 today, would have to pay tax on $150,000 of the gain.
Another situation that has bitten some folks. They turned their old home into a rental and purchased a new home. Let’s say they lived in the old home for three years and rented it out for 20 years. They decide to sell that rental finally. Their first thought is to move back into that rental and make it a personal residence for the next two years, then sell it, paying no tax on the first $500,000 of gain. Well, Nancy Pelosi and her friends put an end to that great tax planning tool.
Now you have to “pro-rate” the years it was a personal residence over the total years owned. Only that pro-rated percentage multiplied by the $500,000 married amount is non-taxable. In this example: 5/20 x $500,000 = $125,000 of the gain on the sale of that old home/rental would be tax free.
Don’t you just love our American tax system? So simple and straight forward. (Can you see my tongue in my cheek?)
Have you heard? Prov 27:8 says, “Like a bird that strays from its nest is a man who strays from his home.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at Also on Facebook.


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