Home is where the heart is.Many sections in the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. provide special treatment for the purchase or sale of taxpayer's principal residence While most of them are fairly straightforward, they may need be examined carefully when a tax payer's marital status marital status, n the legal standing of a person in regard to his or her marriage state. changes due to divorce or remarriage Re`mar´riage n. 1. A second or repeated marriage. Noun 1. remarriage - the act of marrying again . PRINCIPAL RESIDENCE While a taxpayer may have man personal residences, only one ca be his or her principal residence this determination is based on all relevant factors. SALE OF A PRINCIPAL RESIDENCE Two major tax breaks are available for taxpayers who sell their principal residences. Gain rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover. . Taxpayers may defer (and thus not currently pay tax on) all or a portion of any gain realized on the sale of a principal residence if he or she purchases or builds a new principal residence within two years before and two years after the sale of the old residence. In addition, the cost of the new residence must exceed the adjusted sales price of the old one. Note: This treatment applies only to gains; losses from the sale of principal residences may not be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. . Exclusion from gain. Taxpayers 55 or older may elect a once-in-a-lifetime exclusion of up to $125,000 in gain from the sale of a principal residence. The taxpayer must have been 55 before the date of the sale and must have used the home as his or her principal residence for at least three of the five years preceding the sale. A widow or widower widower n. a man whose wife died while he was married to her and has not remarried. WIDOWER. A man whose wife is dead. A widower has a right to administer to his wife's separate estate, and as her administrator to collect debts due to her, generally for not meeting these requirements still may make the election if he or she meets the age test an the deceased spouse satisfied the use test as of the date of sale. Note: Once this exclusion ha been elected, even if not for the maximum amount, it is no longer available to a taxpayer. DIVORCE Typically, one of three situations is present in a divorce: 1. One spouse transfers his or her interest to the other spouse, who continues to own and reside in the house after the divorce. If the transfer is incidental Contingent upon or pertaining to something that is more important; that which is necessary, appertaining to, or depending upon another known as the principal. Under Workers' Compensation statutes, a risk is deemed incidental to employment when it is related to whatever a to the divorce, no gain or loss is recognized. The recipient spouse has a basis in the house equal to his or her previous basis plus the transferor spouse's previous basis. (Note: If not properly structured, the transaction still could result in adverse gift tax consequences.) 2. The principal residence is sold and the proceeds divided. If the residence was held jointly, one half of the realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. is attributed to each spouse. Each can then decide whether to roll over or exclude gain (if applicable). However, if the couple elected to use the exclusion during their marriage or if one spouse sold separately owned property during the marriage, it no longer would be available. 3. Both spouses keep the principal residence. If the residence is retained by both parties after their divorce, no gain or loss is triggered. If one of the spouses continues to reside in the house, it remains his or her principal residence; this spouse still can roll over or exclude gain. The nonresident non·res·i·dent adj. 1. Not living in a particular place: nonresident students who commute to classes. 2. spouse loses these rights unless he or she purchases and occupies a new principal residence within two years. If neither spouse resides in their previous principal residence, they both may lose the rollover and exclusion opportunities. REMARRIAGE Similar issues are present on remarriage. If each future spouse owns a residence and they decide to live in one of them after marrying, the spouse owning the other residence loses the opportunity to roll over gain; in such situations, the individuals obviously should make some decisions and take some actions before they get married. The availability of the gain exclusion for remarried individuals depends on whether the taxpayers already benefited (directly or indirectly) from the exclusion. If one spouse already used his or her exclusion before the marriage, the other spouse's ability to exclude gain on a sale after their marriage is lost. For both spouses to have the right to exclude gain, each must sell his or her respective principal residence before marrying. For a discussion of these issues, see "Tax Planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. for the Personal Residence in the Context of Divorce and Remarriage," by Richard Harris
Richard St. John Harris (1 October 1930 – 25 October 2002) was an Academy Award-nominated and Grammy Award-winning Irish actor, singer and songwriter. , in the October 1993 issue of The Tax Adviser. |
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