Excluding Gain on Sale of Personal Residence

How do you account for gain from the sale of your residence if you have used part of it for business? What if you own a home with someone to whom you are not married? Can you exclude gain from the sale of land on the lot your residence occupies?

Treasury Regulations governing the special exclusion of gain from the sale of your principal residence answer a number of questions about exactly how the rules apply. Of special interest, of course, are situations other than the most common one of a husband and wife owning a single residence for a period of more than two years and excluding up to $500,000 gain ($250,000 each) on a sale. Here's what the regulations say about three special situations.

RECAPTURE OF DEPRECIATION TAKEN FOR BUSINESS USE

When you sell your personal residence you must “recapture” and pay tax on any depreciation claimed for business use of the residence after May 6, 1997. However, no portion of a gain represented by an excess of selling price over cost is allocated to that part of the home used for business. That's a taxpayer friendly interpretation, and might even justify filing an amended return if you sold a personal residence within the last three years, and allocated gain to the business portion.

APPLYING THE EXCLUSION TO SALES BY JOINT OWNERS WHO ARE NOT MARRIED

Joint owners of a residence who are not married, and who sell their interest in a dwelling that has been their primary residence for at least two years out of the preceding five, may each exclude up to $250,000 of gain.

SALE OF VACANT LAND USED AS PART OF RESIDENCE

No gain is required to be recognized on a sale of land that you owned and used as part of your residence if the dwelling itself is sold within two years before or after sale of the land. In order to qualify for this special treatment, land must be adjacent to land containing the dwelling and all parts of the sale must meet the two-years-out-of-five requirement. One exclusion will apply to the combined sale of land and dwelling.

If you have a question about excluding gain from the sale of your personal residence from your taxable income, let us know. We are here to help!