Category: Tax Law

Tax Free Gains from Home Sales

May 13, 2014

One of the most significant tax advantages to owning a home comes at the back end of ownership, when you decide to sell it for a profit. A homeowner can exclude up to $250,000 of such profit from the federal capital gains tax. For married couples filing a joint tax return, the exclusion jumps to $500,000.

This big tax break does come with some basic requirements. It applies to the sale only of a principal residence, not of a vacation home or investment property. With some limited exceptions for poor health, job changes, and unforeseen circumstances, the taxpayer must have owned and used the home as a primary residence for at least two of the five years preceding the sale of the home. (But the two years need not be an uninterrupted time span.)

If the history of the home includes some business use, the owner cannot exclude that part of the gain that is equal to the depreciation claimed while the house was used as rental property. This scenario could arise when the owner rents out the house for a period of time but then moves back in, sells it, and otherwise qualifies for the exclusion related to that sale.

There is another two-year rule that comes into play after a taxpayer claims the home-sale exclusion. There is no limit to the number of times that the exclusion can be claimed for multiple sales, but, as a rule, once the exclusion is claimed, the taxpayer must wait two years before claiming another such exclusion.

For a married couple to qualify for the exclusion, it is sufficient if either spouse meets the ownership requirement. However, both spouses must meet the use requirement. Neither spouse is rendered ineligible for the exclusion because he or she had already excluded the gain on a different primary residence during the two years preceding the date of the current sale.

The IRS Is Here To Help

September 13, 2011

To help struggling taxpayers who owe back taxes, the Internal Revenue Service (IRS) recently unveiled a series of new steps to help people get a “fresh start,” to use the phrase invoked by the IRS Commissioner, with their tax liabilities. The general idea is to recognize the challenging economic environment the country faces while also keeping the tax revenue flowing in at acceptable levels. The focus is on changes to the tax lien system and other collection tools already used by the IRS that will make paying taxes a little easier on taxpayers.

Tax Lien Thresholds

The IRS will significantly increase the dollar thresholds for when liens are filed to a new dollar amount that will be in keeping with inflationary changes that have occurred since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.

A federal tax lien is no trivial matter. It gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt, and it can establish priority rights against certain other creditors. Since a tax lien can also adversely affect a taxpayer’s credit rating, taxpayers are well advised to arrange for the payment of taxes as quickly as possible.

Tax Lien Withdrawals

The IRS will make it easier for taxpayers to obtain lien withdrawals under certain circumstances, including the IRS’s determination that the lien filing was premature or that the taxpayer has agreed to an installment payment plan. To facilitate the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

The IRS is making other important changes to liens when taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals in a few different situations: for a taxpayer entering into a DDIA; for a taxpayer converting a regular Installment Agreement to a DDIA; for a taxpayer already on an existing DDIA, upon the taxpayer’s request; and for a taxpayer demonstrating after a probationary period that direct debit payments will be honored.

Installment Agreements and Small Businesses

The IRS has made streamlined Installment Agreements available to more small businesses by raising the dollar limit to allow more small businesses to participate. Small businesses with $25,000 or less in unpaid taxes can participate. Previously, only small businesses with under $10,000 in tax liabilities could participate. Small businesses will have 24 months to pay.

Small businesses with an unpaid assessment balance greater than $25,000 may qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less. But small businesses will need to enroll in a DDIA in order to participate.

Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of taxpayers who can use the help. Taxpayers with annual incomes of up to $100,000 can participate. Participants must have a tax liability of less than $50,000, doubling the previous limit of $25,000 or less.

An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. As you might expect, it is something of a last resort. Generally, an OIC will not be agreed to by the IRS if the IRS believes, given the taxpayer’s income and assets, that the liability can be paid in full as a lump sum or through a payment agreement.