It’s a simple rule. A rule that will save you thousands, if not hundreds of thousands, of dollars.

From today’s Globe:

DEAR BOB: My husband and I lived in our home for 22 months before selling it. He reads the tax law to mean that we get a tax exemption for the time spent in our house. For example, if we lived in it 12 months, we would get 50 percent of the $500,000 exemption for a married couple. Is this correct or will we owe tax on our sale profit? –Michelle F.

(Short answer: No, you screwed up royally.)

DEAR MICHELLE: It’s a shame you didn’t wait to sell until after 24 months of ownership and occupancy to obtain the full $500,000 tax exemption.

Your husband conveniently misunderstood Internal Revenue Code 121. To qualify for a principal-residence-sale partial exemption, the reason for the sale must be one of those specified in the tax code and its regulations.

If your reason for the early sale qualifies [due to a job location change, health reasons, or “unforeseen circumstances” such as divorce, job loss, multiple births, etc], then you may be eligible for a partial tax exemption up to 22/24 (11/12) of the $500,000 exemption for a married couple (up to $250,000 for a single home seller).

However, if you sold your home for other reasons, such as moving to a better neighborhood or a bigger house, then you don’t qualify for a partial exemption and your capital gain is fully taxable. For details, please consult your tax adviser.

(All you sour people will say it doesn’t make a difference, because all owners are “under water”, any way.)

Complete story: Investing in pre-construction home can be disastrous (2nd item) – By Bob Bruss, Inman News, by way of The Boston Globe

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