Selling your home and moving into a smaller one or a condo is seldom an easy decision, but at least part of the decision-making process is a little easier in light of an exclusion that eliminates most people's federal tax liability on gain from the sale or exchange of their homes.

Under these rules, up to $250,000 of the gain from the sale of single person's principal residence is tax-free. For certain married couples filing a joint return, the maximum amount of tax-free gain doubles to $500,000.

Like most tax breaks, however, the exclusion has a detailed set of rules for qualification. Besides the $250,000/$500,000 dollar limitation, the seller must have owned and used the home as his or her principal residence for at least two years out of the five years before the sale or exchange. In most cases, sellers can only take advantage of the provision once during a two-year period. However, a reduced exclusion is available if the sale occurred because of a change in place of employment, health, or other unforeseen circumstances (that IRS may specify in future regulations). Where the exclusion wasn't used on another home sale within the previous two years, the amount of the reduced exclusion equals a fraction of the $250,000/$500,000 dollar limitation. The fraction is based on the portion of the two-year period in which the seller satisfies the ownership and use requirements.

These rules can get quite complicated if you marry someone who has recently used the exclusion provision, if the residence was part of a divorce settlement, if you inherited the residence from your spouse, if you sell a remainder interest in your home, or if you have taken depreciation deductions on the residence.

But there are also some tricks, such as being able to exclude most of the gain on a rental duplex if you time the sale and your personal living arrangements properly.

We can help. Proper planning can be the key to nailing down the optimum tax treatment for your residence sale exclusion. We are prepared to assist you with advice about any of the issues discussed above. Please call Mike Hanrahan at 276-0457 if you would like to discuss these or any other tax or financial planning issues

Michael R. Hanrahan CPA, CFP, CFE, CVA, CBA - Graduated with HONORS with a B.S. in Business (majoring in accounting and finance), from Eastern Illinois University, holds an MBA, earned his CMA designation, and is a Certified Business Appraiser. Prior to forming Hanrahan & Company, P.C., he worked for Ernst & Whinney, Alascom and local CPA and consulting firms. He is past president of the Alaskan Chapter of the Institute of Management Accountants and current secretary of the National Association of Certified Valuation Analysts (NACVA) Alaskan chapter. He is also a member of the Institute of Business Appraisers, the National Association of Forensic Economics, the American Institute of CPA’s and is a committee chairman with the Alaska Society of CPA’s. He has appeared on television, spoken and published on various tax and business topics, done course work in the collaborative Boston University doctoral program and taught graduate and undergraduate courses in finance, accounting and taxation at local universities, was appointed to NACVA’s national teaching team to instruct CVA recertification courses and is also on the Course Review Committee. His primary practice areas include individual, business, corporate and trust taxation and planning, business valuations, divorce planning, litigation support and individual and business financial planning.