IRS Issues Home Sale Exclusion Rules

A 1997 law changed the old "replacement residence" rules with a new rule that excludes up to $250,000 ($500,000 for a married couple filing jointly) of gain. Unlike a previous once-in-a-lifetime exclusion for older persons, you may claim the new exclusion repeatedly regardless of your age, but usually only once every two years.

The IRS has issued final regulations explaining how this new exclusion works, answering many questions raised since 1997. They cover such things as what determines a principal residence, when gain must be allocated to business use of a home and how to meet the requirement of owning and using the home as a principal residence for two of the five years before the sale.

In addition, the IRS welcomes comments on temporary regulations dealing with an exception to the two-year rule. This allows a reduced maximum exclusion amount when the primary reason for the home sale is health, change in place of employment, or "unforeseen circumstances." These proposed regulations are effective now, but may be changed when finalized.

Find out how you can sell your home without raising your taxes. IRS news release 2002-142 gives a more extensive overview of the new rules. Or go straight to the details:

TD 9030 -- final regulations on Exclusion of Gain from Sale or Exchange of a Principal Residence.

TD 9031 -- temporary regulations Reduced Maximum Exclusion of Gain from Sale or Exchange of Principle Residence.