Property Transactions: Nonrecognition of Gains or Losses
Taxable income generally includes gain from the sale or exchange of property. To deduct losses you must rely on statutory permission.
Gains - Gains are taxed on any disposition of property, generally, whether by sale, exchange, or other means of disposition.
Recognition - Recognition refers to when/if you include the gain in your taxable income.
Sometimes Gain on sale may be
o Temporarily not recognized.
o Examples include exchanges of business property for like kind business property, involuntary conversions and certain stock swaps.
o Permanently not recognized.
o Examples include sales of personal residences and appreciation up to date of death on inherited property.
Sale of Personal Residence (Code Section 121)
• Rules effective for home sales after May 6, 1997.
Taxpayers may exclude gain from the sale of their principal residence:
• $250,000 of gain if single, or
• $500,000of gain if married filing jointly.
To qualify, taxpayers must:
• Have owned the house two of the last five years,
• Have occupied the home as their principal residence two of the last five years.
• This exclusion may be only used once every two years.
• The basis of the new house is not reduced by the gain excluded.
• You may elect out of this provision and pay tax on the gain if you wish.
• Gains over excluded amount are taxable and may not be “rolled over” like in prior law.
• You may not use the exclusion within five years of acquiring the property through a ‘like kind’ (Section 1031) exchange.
Special Rules for married taxpayers
The exclusion is allowed if:
• Both meet the USE test, but
• Only one meets the OWNERSHIP test.
BUT, neither has used their principal residence exclusion in a prior sale within...