The $250,000/$500,000 Home Sale Tax Exclusion

Posted on by Emi Tsuji

If you’re a homeowner this is the one tax law you need to thoroughly understand.

If you qualify for the exclusion, you may do anything you want with the tax-free proceeds from the sale. You are not required to reinvest the money in another house. But, if you do buy another home, you can qualify for the exclusion again when you sell that house. Indeed, you can use the exclusion any number of times over your lifetime as long as you satisfy the requirements discussed below.

The Two Year Ownership and Use Rule

Here’s the most important thing you need to know: To qualify for the $250,000/$500,000 Calendar2home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Your home can be a house, apartment, condominium, stock-cooperative, or mobile home fixed to land.

If you meet all the requirements for the exclusion, you can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years.

The two-year rule is really quite generous since most people live in their home at least that long before they sell it. (On average, Americans move once every seven years.) By wisely using the exclusion, you can buy and sell many homes over the years and avoid any income taxes on your profits.

One aspect of the exclusion that can be confusing is that ownership and use of the home don’t need to occur at the same time. As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times. The rule is most important for renters who purchase their rental apartments or rental homes. The time that a purchaser lives in the home as a renter counts as use of the home for purposes of the exclusion, even though the renter didn’t own the home at the time.

If You Are Not Living in the Home

To qualify for the home sale exclusion, you don’t have to be living in the house at the time you sell it. Your two years of ownership and use may occur anytime during the five years before the date of the sale. This means, for example, that you can move out of the house for up to three years and still qualify for the exclusion.

This rule has a very practical application: It means you may rent out your home for up to three years prior to the sale and still qualify for the exclusion. Be sure to keep track of this time period and sell the house before it runs out.

The Home Must Be Your Principal Residence

To qualify for the exclusion, you must have used the home you sell as your principal residence for at least two of the five years prior to the sale. Your principal residence is the place where you (and your spouse if you’re filing jointly and claiming the $500,000 exclusion for couples) live.

You don’t have to spend every minute in your home for it to be your principal residence. Short absences are permitted—for example, you can take a two-month vacation away from home and count that time as use. However, long absences are not permitted. For example, a professor who is away from home for a whole year while on sabbatical cannot count that year as use for purposes of the exclusion.

You can only have one principal residence at a time. If you live in more than one place—for example, you have two homes—the property you use the majority of the time during the year will ordinarily be your principal residence for that year.

If you have a second home or vacation home that has substantially appreciated in value since you bought it, you’ll be able to use the exclusion when you sell it if you use that home as your principal home for at least two years before the sale.

$500,000 Exclusion for Married Couples

Wide loversThere are certain additional requirements you must meet to qualify for the $500,000 exclusion. Namely, you must be able to show that all of the following are true:

  • you are married and file a joint return for the year
  • either you or your spouse meets the ownership test
  • both you and your spouse meet the use test, and
  • during the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means they can each qualify for up to a $250,000 exclusion. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. For joint owners who are not married, up to $250,000 of gain is tax-free for each qualifying owner.

If your spouse dies and you subsequently sell your home, you qualify for the $500,000 exclusion if the sale occurs within two years after the date of death and the other requirements discussed above were met immediately before the date of death.

Be sure to consult a tax advisor before exercising this exclusion.

Severely and Permanently Disabled Resident Exclusion

Posted on by Emi Tsuji

Proposition 110

Proposition 1101 is a constitutional initiative passed by California voters that provides property tax relief for severely and permanently disabled claimants when they sell an existing home and buy or build another. It allows the transfer of the base-year value of their existing home to a newly purchased or constructed home within select counties in the State of California. In addition, the initiative also provides relief for modifications that make a home more accessible for a severely disabled person.

Who Qualifies?

If you or your spouse that lives with you are severely and permanently disabled2, you can buy a home of equal or lesser value than your existing home and transfer the trended base year value of your existing home to your new property. Also, you can modify your current home as long as the modifications directly satisfy disability requirements.

The transfer of a trended base value from one property to another is a one-time benefit only. You must buy or newly construct a replacement property within two years of the sale of the original property. Both the original property and the replacement property must be your principal place of residence, and you must file your claim within three years to receive retroactive relief following the purchase or completion of new construction of your replacement property. Once you have filed and received this tax relief, neither you nor your spouse who resides with you will qualify to receive this benefit again.

If a person has been granted a Proposition 60/90 benefit and subsequently becomes severely and permanently disabled, he/she may also qualify for a Proposition 110 benefit.

1 For expanded definitions of Proposition 110, see Revenue and Taxation (R&T) Code Sections 69.5 and 74.3. It is available online at  www.boe.ca.gov/proptaxes/faqs/propositions110.htm.

2 The Revenue and Taxation Code defines “a severely and permanently disabled person” as any person who has a physical disability or impairment which results in a functional limitation as to employment, or substantially limits one or more major life activities of that person, and which has been diagnosed as permanently affecting the person’s ability to function.

Eligibility Requirements

  1. Both your original and replacement property must be eligible for the homeowners’ or disabled veterans’ exemption and the replacement property must be your principal residence.
  2. The replacement property must be of equal or lesser “current market value” than the original property. The “equal or lesser” test is applied to the entire replacement residence, even though the owner of the original property may acquire only a partial interest in the replacement residence. Owners of two qualifying original residences may not combine the values of those properties in order to qualify for a Proposition 110 base-year transfer to a replacement residence of greater value than the more valuable of the two original residences.
  3. The replacement property must be purchased or built within two years (before or after) of the sale of the original property.  To receive retroactive relief from the date of transfer, you must file your claim within three years following the purchase or completion of new construction of the replacement property.  A claim that is filed after the three-year filing period may receive the benefits commencing with the lien date of the assessment year in which the claim is filed.
  4. You or a spouse residing with you must be severely and permanently disabled when the original property was either sold or modifications were completed.
  5. The disabled person, spouse or legal guardian must submit a Physician’s Certificate of Disability (Form OWN-107)with the claim.

Office

Frequently Asked Questions

My original home is located outside Los Angeles County, but my replacement home is in Los Angeles County. Do I qualify for relief?

Yes.

I plan to relocate from Los Angeles County to another county. Do I qualify for relief?

You may qualify for relief. As of June 5, 2015, the following counties in California have an ordinance enabling Proposition 110:

  • Alameda
  • El Dorado
  • Los Angeles
  • Orange
  • Riverside
  • San Bernardino
  • San Diego
  • San Mateo
  • Santa Clara
  • Tuolumne
  • Ventura

Since the counties indicated above are subject to change, we recommend contacting the county to which you wish to move to verify Proposition 110 eligibility.

Do all replacement homes qualify?

If you meet all other eligibility requirements, relief is granted for single family residences, condominiums, units in planned developments, cooperative housing, community apartments, manufactured homes subject to local real property tax, and living units within a larger structure consisting of both residential and non-residential accommodations.

If I make an improvement to my replacement home within two years of purchase, can I get additional tax relief for the new construction?

Yes, as long as the total amount of your purchase and the new construction does not exceed the market value of the original property at the time of its sale..

What does “equal or lesser value” of a replacement property mean?

The meaning of “equal or lesser value” depends on when you purchase the replacement property. In general, equal or lesser value means the following:

100% or less of the market value of the original property if a replacement property is purchased or newly constructed before the original property is sold, or

105% or less of the market value of the original property if a replacement property is purchased or newly constructed within the first year after the original property is sold, or

110% or less of the market value of the original property if a replacement property is purchased or newly constructed within the second year after the original property is sold.

When making the “equal or lesser value” test it is important to understand that the market value of a property is not necessarily the same as the sale/purchase price. The Assessor will determine the market value of each property. If the market value of your replacement property exceeds the “equal or lesser value” test, no relief is available. It is “all or nothing” with no partial benefits granted.

If I qualify for Proposition 110 benefits, do I still need to file for a Homeowners’ Exemption on the replacement property?

Yes. Homeowners’ exemptions are not automatically granted.

Does the owner of a home that is modified to make it more accessible need to be disabled to qualify for Proposition 110 benefits?

No. The severely and permanently disabled person need only be a permanent resident of the dwelling.

What tax relief is available for homes modified to improve accessibility?

If qualified, the value of the improvement, addition, modification, or feature that specially adapts a home’s accessibility for a severely and permanently disabled person is excluded from property tax assessment.

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