Article: Excerpts from research article-the opportunity for partial tax relief for homes sold within two years of purchase.

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Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.

THIS RESEARCH ARTICLE FIRST APPEARED IN THE JOURNAL OF PERSONAL FINANCE.IT IS PUBLISHED BY THE INTERNATIONAL ASSOCIATION OF REGISTERED FINANCIAL CONSULTANTS(IARFC);THIS ARTICLE IS AUTHORED BY NICOLE G SANTOMERO CPA,MST;SENIOR LECTURER OF ACCOUNTING AND TAXATION,WIDENER UNIVERSITY AND KENN BEAM TACCHINO,JD,LLM,RFC, PROFESSOR OF TAXATION AND FINANCIAL PLANNING,WIDENER UNIVERSITY.THIS ARTICLE APPEARED IN THE JOURNAL OF PERSONAL FINANCE,VOLUME 5, ISSUES 4 2007.

ABSTRACT:
'UNDER INTERNAL REVENUE CODE SECTION 121 A SUBSTANTIAL EXCLUSION FROM THE GAIN ON THE SALE OF A HOME IS AVAILABLE IF TAXPAYERS MEET SPECIFIED CRITERIA, INCLUDING ONLY USING THE TAX RELIEF ONCE EVERY 2 YEARS.HOWEVER PARTIAL RELIEF MAY BE AVAIALBLE IF THE CLIENT PLANS CORECTLY OR IF HIS OR HER  CICUMSTANCES ARE ELIGIBLE FOR CERTAIN EXCEPTIONS.'
'18% OF INDIVIDUALS  SELL THEIR HOMES  WITHIN 2 YEARS OF PURCHASE .''IT IS NOT UNUSUAL TO FIND CLIENTS WHO NEED RELIEF FROM THE CODE SECTION 121 2 YEAR HOLDING REQUIREMENT.'
'IN ADDITION TO ANALYZING THE EMPLOYMENT AND HEALTH EXCEPTIONS PROVIDED IN FEDERAL TAX REGULATIONS, THIS ARTICLE FOCUSES ON THE EMERGING TRENDS SURROUNDING THE UNFORSEEN CIRCUMSTANCES EXCEPTION IN ORDER TO EXAMINE THE OPPORTUNITIES AVAILABLE FOR TAX RELIEF WHERN A QUICK RESALE IS ANTICIPATED.'

PLANNING CONSIDERATIONS.

IF GAIN IS APPLICABLE' AND IT EXCEEDS LIMIT,ANY EXTRA INCOME IS REPORTED ON SCHEDULE D OF IRS FORM 1040 AND IS TAXED AT ORDINARY INCOME TAX RATES, IF THE HOUSE IS HELD LESS THAN 1 YEAR AND AT CAPITAL GAINS RATES IF THE HOUSE IS HELD FOR MORE THAN 1 YEAR.'SECTION 1034 WAS REPEALED IN 1997 WHEN THE NEW CODE  SETION 121 WAS ENACTED.'
'THE ONLY REMAINING TWO SITUATIONS FOR DEFERRING EXCESS GAIN INVOLVE CODE SECTION 1033(INVOLUNTARY CONVERSIONS) AND CODE SECTION 1031(LIKE KINF EXCHANGES)
'THE PARTIAL EXCLUSION IS COMPUTED BY MULTIPLYING THE MAXIMUM DOLLAR LIMITATION OF $500,000($250,000 FOR SINGLE TAXPAYERS) BY A FRACTION.THE NUMERATOR OF THE FRACTION IS THE SHORTEST OF THE FOLLOWING PERIODS':
1)'PERIOD OFTIME CLIENT OWNED PROPERTY DURING THE 5 YEAR PERIOD, ENDING ON THE DATE OF SALE.'
2)'PERIOD OF TIME THAT THE CLIENT USED THE PROPERTY AS PRIMARY RESIDENCE DURING 5 YEAR PERIODENDING ON THE DATE OF SALE.'
3)'PERIOD OF TIME BETWEEN THE DATE OF PRIOR SALE FOR WHICH THE CLIENT USED SECTION 121 EXCLUSION AND THE DATE OF CURRENT SALE.'
'NUMERATOR MAY BE EXPRESSED INDAYS OR MONTHS.'
DENOMINATOR  OF THE FRACTION IS 730 DAYS OR 24 MONTHS,DEPENDING ON THE  MEASURE OF TIME USED IN THE NUMERATOR.'

EXAMPLE:A COUPLE,'FILING STATUS MARRIED FILING JOINTLY,PURCHASE AND USE A HOUSE FOR 10 MONTHS BEFORE SELLING THE HOME DUE TO A CHANGE IN PLACE OF EMPLOYMENT.THEY HAVE NOT EXCLUDED GAIN UNDER SECTION 121 ON A PRIOR SALE WITHIN THE LAST 2 YEARS,THEREFORE THEY ARE ELIGIBLE TO EXCLUDE UP TO $208,333 OF THE GAIN ON THE SALE OF THEIR HOUSE(10 MONTHS/24 MONTHS X $500,000).'

'BEST RESULTS FOR A CLIENT MAY BE POSSIBLE IF THE CLIENT CAN DELAY THE SALE UNTIL THE FULL EXCLUSION IS IN PLAY.''ADDITIONAL WAIT MAY MEAN SIGNIFICANT TAX ADVANTAGES.''FOR CLIENTS WHO CANNOT MEET THE WAITING PERIOD IT IS NICE TO KNOW PARTIAL RELIEF MAY BE AN OPTION.'

CONCLUSION.

'DESPITE SLOWDOWN, HOUSING PRICES IN MANY AREAS OF THE COUNTRY HAVE INCREASED DRAMATICALLY OVER THE LAST SEVERAL YEARS'-SO 'IT IS NOT UNCOMMON FOR INDIVIDUALS WHO HAVE RECENTLY SOLD HOME TO HAVE ACCRUED A SUBSTANTIAL GAIN IS A RELATIVELY SHORT PERIOD OF TIME.MARRIED HOMEOWNERS WHO HAVE OWNED AND OCCUPIED THE HOME FOR 2 YEARS PRECEDING THE SALE, ARE ABLE TO SHIELD UP TO $500,000 OF THE GAIN FRO TAXATION.'BUT,'HOMEOWNERS WHO HAVE NOT OWNED THE HOME FOR AT LEAST 2 YEARS PRECEDING THE SALE PRESENT SOME INTERESTING PLANNING OPPORTUNITIES.'
WHERE CLIENTS DO NOT MEET 2 YEAR OWNERSHIP TEST,PRIMARY REASON FOR THE SALE SHOULD BE BE DETERMINED FIRST.IF CLIENT'S REASON FALLS UNDER ONE OF THE SAFE HARBORS PROVIDE BY THE IRS, CLIENT IS PROVIDED THE BENEFITS OF A PARTIAL EXCLUSION OF THE GAIN FROM SALE.
IF CLIENT DOES NOT PASS THE SAFE HARBOR TEST, PARTIAL RELIEF MAY BE BE STILL AVAILABLE UNDER SPECIAL CIRCUMSTANCES-MEDICAL,EMPLOYMENT AND OTHER UNFORESEEN CIRCUMSTANCES, THE CLIENT WILL BE ELIGIBLE FOR PARTIAL TAX RELIEF.

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