Residence
Today I want to talk to you about something that is most dear to all women. No, I’m not talking about jewelry or little children. I’m talking about our homes (I know that was sexiest, I’m just having a little fun. Please don’t send me any harsh emails).
Anyway, for most people their homes are one of their most valued personal and financial assets. So today we’ll talk about how the federal tax laws affect them:
- Gain on Sale
When we sell our home, the tax law allows us to exclude up to $250,000 profit from income tax. If we’re married then we can exclude up to $500,000. If our spouse has passed away we can exclude up to $500,000, but only if we sell within two years of the spouse’s death (otherwise it’s limited to $250,000).
- Period of Ownership
In order to qualify for these exclusions, the house must have been your primary residence for at least two of the last five years. There is a special rule for the military – the 5-year rule is suspended for them for as long as 10 years if they are on extended duty.
- New Spouses
Divorce is a common occurrence in today’s society. I recently read that our addictions to Facebook and other mindless cyber space escapes are a significant contributor to divorces.
The tax law provides that if a spouse gets the residence in a divorce, the use of the property by the former spouse or the new spouse carries over to her for purposes of these qualification periods.
- Partial Interest
The rules excluding gain on the sale of our home from income tax also apply to sales of a partial interest in our home. Thus we can sell a portion of the home to another person and exclude that gain. We can also sell a remainder interest in our home and keep living there under a life estate (kind of like a reverse mortgage) and exclude that gain as well.
- Foreclosure by IRS
I am often asked if the IRS can seize and sell our homes to pay income taxes. The answer is yes it can and will do so, almost without restriction. The state laws preventing creditors from doing so do not apply to the IRS.
I am also often asked if the IRS can seize and sell our homes to pay taxes if they are owed by only one spouse. This is a common occurrence. Divorced spouses often bring in their tax liabilities to a new marriage. Also, a husband is often liable for unpaid payroll taxes of his business while the wife may not be liable. Also, one spouse can obtain innocent spouse treatment and be freed of all or part of the tax liability. All of these can affect the possible IRS sale.
Whether the IRS can sell a residence if only one spouse is liable, and if so how much of the proceeds may go to that innocent spouse, is a very complex legal issue. Much can be done in advance if planned for. It is essential you get with an experienced tax attorney for help as soon as possible.
So I asked my wife to look this article over and tell me what she thought. After reading the first paragraph, she stopped and asked for high end jewelry. Ouch!