.htm_cmp_willow000_vbtn.gif){kind=small}
April 3, 2008
NEW RULE FOR SALE OF YOUR HOME
Before I get to the new tax law, I have to make a comment on the IRS notices that you have received regarding the Economic Stimulus Rebate checks that will be issued this summer. I’ve received a lot of phone calls in the past week regarding the latest notice from the IRS asking that you write “Economic Stimulus Rebate” on the top of your form 1040. Why do they want you to do that? Read on please.
For people who have NO taxable income and are filing a return with all zeros, you should write “Economic Stimulus Rebate” across the top of the return. This includes recipients of Social Security, and other retirement benefits, that are not taxable and have no other income whatsoever. Historically, the IRS never processed returns that have a zero on every line. Tax preparers were stymied early in the tax year with these types of individuals, because tax returns with zero income were not allowed to be filed electronically. Now, our tax programs have been updated with the ability to print “Economic Stimulus Rebate” across the top of the form, allowing us to electronically file returns showing zero income. During the interim, we were improvising by adding $1 of interest income to these returns to make them eligible for electronic filing. Isn’t it wonderful when the IRS makes up new rules with 3 weeks left in the filing season! Now, some good news for surviving spouses who sell their home.
The tax laws regarding the sale of your home have changed several times over the years. Many of you may remember the rule that said as long as you purchased a new home that cost at least as much as the old home that you sold, there was no tax. But, since May 13, 1997, the law has been changed to allow you to exclude up to $500,000 ($250,000 for single taxpayers) of the gain on selling your principal residence if you lived there for 2 out of the last 5 years.
When one spouse dies, the only way that that the surviving spouse could sell her house and get the $500,000 gain exclusion was if the house was sold in the same year as her spouse died. If she sold it the following tax year, she would only be allowed a $250,000 exclusion. Congress saw this as a problem and fixed it in 2007.
On December 20, 2007, the Mortgage Forgiveness Debt Relief Act of 2007 was passed. This allows an unmarried surviving spouse to sell her house, within two years after the death of her spouse, and qualify for the $500,000 gain exclusion. This new Internal Revenue Code sec 121(b)(4) applies to sales occurring after December 31, 2007.
This change is important for surviving spouses who live in high-priced communities as well as those who owned the home in their own name when their spouse died. Many times when one spouse is a nursing home resident, it is advisable to transfer the home into the healthy spouse’s name alone. Some married couples own their home in only one of the spouse’s names because they are worried about getting sued due to the nature of the other spouse’s occupation.
Here is an example: John and Jenny bought their house in 1950 for $15,000. Because John was a contractor, they kept the house in Jenny’s name alone, fearing that John might be sued. John dies on December 31, 2007 and Jenny now wants to sell her home so that she can move closer to her children. Her house is now worth $500,000.
Under the Old Law: Jenny would sell her house in 2008. In 2008 she is considered single and is entitled to a $250,000 gain exclusion. Her gain on the sale of the house would be $235,000 based upon a sales price of $500,000 less her cost of $15,000 and the $250,000 gain exclusion. Her combined Federal and Massachusetts tax, due to the sale, would be about $47,000.
Under the New Law: Because Jenny is selling her home within 2 years of John’s death, she gets a $500,000 exclusion and pays no tax.
Before selling your home, please ask you tax advisor for help to make sure you understand the tax implications of selling your home.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org