This article can be found in The Argonaut, where Lisa Phillips is a regular contributor.
Q: I’m considering taking advantage of my homes’ increased value, selling, and relocating outside of California but I’ve lived in my home for less than 2 years, and am concerned about taxes on my capital gains. Is there any way around this?
A: This question is one I have been asked recently. Although people leaving Southern California for areas with lower costs of living is not a new phenomenon, the current high property values and changes to the tax laws seems to have quite a few people thinking it’s time to take their money and run. Many of these people purchased their residence within the past two years, taking advantage of low interest rates, and even in that short time, enjoyed appreciation. No one wants to give a chunk of that profit to the IRS!
The good news is that there are exceptions to the general rule that capital gains from sale of a residence are subject to exclusions from income if you have lived in the residence for at least 2 of the past 5 years. That capital gain exclusion is greatly relied upon by sellers of residential real estate, and excludes up to $250,000 in gain for individuals and up to $500,000 for married couples. That is the general rule, but there are exceptions that allow a seller to benefit from the exclusion even if they have not lived there for two years.
Some of those exceptions are:
- If you become physically or mentally unable to care for yourself. In this case, you need to have resided in the home for only 1 year of the recent 5 years. Further, the IRS will include any time spent in a licensed care facility toward that 1 year requirement.
- A divorce or separation.
- The death of a spouse.
- Your home has been destroyed or condemned.
- You were a service member during your ownership of the home.
- You are engaging in a like-kind/1031 exchange.
There are additional exceptions, which may allow you a partial exclusion of capital gains, permitting you to take some proportion of the standard capital gain exclusion. Some of these exceptions are:
- You or your spouse or other resident of the home are relocating for work at least 50 miles farther from your home than your current employment is.
- You are moving for health care purposes, to provide medical or personal care for certain family members, or you are moving under a doctor’s recommendation for you or your spouse or co-resident of the home.
- You have suffered unforeseeable events, such as your home being destroyed or condemned, a death of a resident in the home, divorce or legal separation, gave birth to twins or more from one pregnancy; became eligible for unemployment, or became financially unable to pay your living expenses due to a change in employment.
Neither of these lists are all-inclusive, and although your situation may not be specified here, that does not mean you have no opportunity for relief. Always consult with a tax profession, providing detailed circumstances of your situation so that you can receive the best advice. For further information on this subject, you can review for yourself the IRS’s publication on this subject at https://www.irs.gov/pub/irs-pdf/p523.pdf -Publication 523 outlines in greater detail the rules and exceptions to the capital gains exclusion rules.
After reviewing the rules, and confirming with your CPA, you may just determine that you are able to sell your home for a profit, and enjoy a lower cost of living without the penalty of sacrificing to the dreaded I.R.S.!
Disclaimer: This article is intended to be primarily for entertainment purposes, and is not to be considered legal advice.
ABOUT LISA PHILLIPS, ESQ./ CA Bureau of Real Estate Lic# 01189413
Lisa Phillips is an active Realtor® in the Los Angeles area, with more than twenty years as a Real Estate Broker and attorney. Lisa is also a member of the National Association of Realtors “Green Resource Council”, and achieved its “GREEN” Designation. Her unparalleled knowledge of real estate, from local markets and pricing to legal issues and deal-making, has made her a trusted and valuable asset to her clients. In addition to her real estate and business savvy, Lisa is passionate about helping others, and works tirelessly to achieve the best results for her clients.
