11 Dec Capital gains exclusion on home sale

 Q. I’m planning on selling my former home. I lived there for 22 years, but it’s now rented and the tenants want to purchase it. I moved into my current home in October 2012. I checked with my accountant to see if I am eligible for New Jersey’s $250,000 exclusion of capital gains. She said I have until October 2015 to sell, but I’ve read conflicting rules about whether you have to have lived there in the past 24 months or the past 36 months. Help! I don’t want to miss this opportunity.

A. It’s a big exclusion to miss, so you’re smart to be careful.

You could forfeit your $250,000 exclusion if you don’t follow the rules exactly, said Gail Rosen, a Martinsville-based certified public accountant.

“This tax break is conditioned on you having used the residence as your principal residence for at least two of the five years preceding the sale,” Rosen said. “The character of the residence at the time of a sale is not important, provided you occupied it as your principal residence for periods adding up to at least two years within the give-year period ending on the date of sale.”

Getting into greater detail, to qualify for the exclusion, you must meet two tests: the ownership test and the use test.

“You are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale,” said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gilette. “You can meet the ownership and use tests during different two-year periods.”

Maye said you must meet both tests during the five-year period ending on the date of the sale.

Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home, Maye said.

Here’s where the 36-month mark comes in.

“The key for you to meet both the use and ownership tests is you would need to sell within 36 months after you moved out of the property,” Maye said.

Because it was rental property at the time of the sale, you must report the sale on Form 4797, Maye said.

“Because you would met the ownership and use tests, you can exclude gain up to $250,000,” he said. “However, you cannot exclude the part of the gain equal to the depreciation you claimed or could have claimed for renting the house.”

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This story was first posted in December 2014.