December 8, 2021

Volume XI, Number 342

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December 07, 2021

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December 06, 2021

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Selling Your Principal Residence in the Time of Tax Reform

Under current Section 121 of the Internal Revenue Code, an individual selling his or her principal residence can exclude up to $250,000 of gain if filing as a single taxpayer or $500,000 of gain if filing jointly if certain requirements are met. The individual generally must have owned and used the home as his or her principal residence for at least 2 years out of the 5 years before the sale or exchange in order to take advantage of this benefit. In addition, most sellers can only take advantage of the provision once during a two-year period.

The Senate and the House of Representatives have both recently proposed new Tax Reform Bills, both of which would amend Section 121 of the Internal Revenue Code for sales or exchanges of principal residences after December 31, 2017.

Under the Senate Bill, during 2018 until 2025, individuals are not taxed on gain of up to $250,000 for a single person and $500,000 for married taxpayers from the sale or exchange of property if during the past 8 years, the property was owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating at least 5 years. Under the Senate Bill, an exception to this rule applies for binding contracts where there was a written binding contract in effect before January 1, 2018 and at all times thereafter before the sale or exchange. Hence, if the contract is not binding, like a letter of intent that may be set aside, this exception likely will not apply. Further, if the binding contract is cancelled, and later reinstated, it also appears that this exception would not apply.

Under the House Bill, the 5 year period is also extended to 8 years, and the two year use and ownership requirement is also stretched to 5 years, as in the Senate Bill. Further, the benefit may only be used for one sale or exchange every 5 years. In addition, the deduction is phased out based on modified adjusted gross income, with the phase out starting for those taxpayers with average modified adjusted gross income of over $250,000 for the tax year and the two preceding taxable years ($500,000 for joint filers). These changes would be effective for sales and exchanges after 2017.

Thus, as we are approaching the end of the year, there is a lot to think about for those taxpayers who have been mulling over listing their house for sale. Of course, it is impossible to predict the future of tax reform, and the Bills may not (yet) be the law of the land, but depending on how tax reform is resolved, there may be benefits to selling in 2017 versus 2018. 

© 2021 Varnum LLPNational Law Review, Volume VII, Number 352
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About this Author

Katie K. Roskam, Michigan, tax attorne
Associate

Katie is an associate in the firm’s tax practice team. She focuses on federal income tax matters for both foreign and domestic clients and issues pertaining to employee benefits and executive compensation. Katie's previous work experience includes researching and writing appellate briefs while clerking at Even & Franks PLLC in Muskegon for several summers. She also worked as a tax research assistant at Loyola University School of Law. She served as an extern for Judge Ronald A. Guzman in U.S. District Court for the Northern District of Illinois and has worked as an...

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