Question:
Does
a minister need to report the gain or loss on the sale of his personal
residence?
Answer:
IRS Publication 523 has
complete details on Selling Your Home, but
we will provide a quick overview.
The
minister must know the selling price,
the amount realized, and the adjusted basis in order to determine the
gain or loss. The following formula can be used by a resident to determine his
or her gain or loss:
Selling Price
-
Selling Expenses
=
Amount realized
-
Adjusted basis
=
Gain or loss
The
selling price is the total amount the
minister receives for the home.
The
amount realized is found by
subtracting selling expenses from the selling price. Some common selling
expenses include commissions and fees that were directly related to the sale of
the home.
The
adjusted basis consists of the
increases or decreases of value that the home has incurred over the period of
ownership by the resident. Look at IRS Publication 523 for instructions on how
to determine the adjusted basis of a
home.
The
gain or loss is the difference
between the amount realized and the adjusted basis. If the difference is a
positive number, then there is a gain; if the difference is a negative number,
then there is a loss. Generally, a gain on the sale of a home is taxable while
a loss is not deductible. However, like most tax rules, there are exceptions!
According
to 26 U.S. Code § 121, “Gross income
shall not include gain from the sale or exchange of property if, during the
5-year period ending on the date of the sale or exchange, such property has been
owned and used by the taxpayer as the taxpayer’s principal residence for
periods aggregating 2 years or more.”
The code goes on to explain that a single individual can
exclude the gain up to $250,000, while a husband and a wife who file a joint
return can exclude up to $500,000 of the gain.
In order to
qualify for this special exclusion of gain, residents must meet the ownership test and the use test. This means that during the
5-year period ending on the date of the sale, the resident must have owned the
home for at least two years (the ownership
test) and lived in the home as a main home for at least two years (the use test). Also, the resident must not
have excluded gain from the sale of another home during the 2-year period
ending on the date of the sale. Details and exceptions to these tests can be
viewed in IRS Publication 523.
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