Which of the following statements regarding the rules relating to the sale of a personal residence is true?
a. The gain exclusion rules apply to sales before May 6, 1997.
b. The gain exclusion is $500,000 for married taxpayers.
c. The home must have been used as a personal residence for at least 5 years preceding the sale.
d. At least one of the residence owners must be over age 55.
The correct answer and explanation is:
The correct answer is b. The gain exclusion is $500,000 for married taxpayers.
Explanation:
The gain exclusion rules for the sale of a personal residence were updated in the Taxpayer Relief Act of 1997. The key aspects of the rules, as they currently stand, include the following:
- Gain Exclusion for Married Taxpayers: Under the rules, if a taxpayer sells their personal residence, they may be able to exclude up to $250,000 of the gain from taxable income. However, for married couples filing jointly, the exclusion amount is $500,000. This means that if a married couple meets the requirements for the exclusion, they can exclude up to $500,000 of gain on the sale of their primary residence.
- Duration of Ownership and Use: To qualify for the exclusion, the home must have been owned and used as the taxpayer’s primary residence for at least two years (not five years). These two years do not need to be consecutive, but they must occur within the five-year period preceding the sale of the home. This is a critical point because option c is incorrect because the requirement is for two years, not five years.
- Age Requirement for Over 55: The option stating that at least one of the residence owners must be over 55 is referring to an older version of the law that allowed people over the age of 55 to exclude up to $125,000 of gain on the sale of their primary residence. This rule is no longer in effect because of the changes made by the Taxpayer Relief Act of 1997.
- Sales Before May 6, 1997: The gain exclusion rules were updated with the passage of the Taxpayer Relief Act of 1997. The rules do not apply to sales before May 6, 1997, which makes option a incorrect.
In summary, the current rule allows for a $500,000 exclusion of gain on the sale of a personal residence for married taxpayers, provided they meet the eligibility criteria.