dmarbell, what did I write that is different than what you wrote? I understand how it works completely, and I wrote the post trying to be fair and set the record straight.

You can take the $250k/$500k exclusion of capital gains only if you used it as primary residence for two of the five years before the date of sale. The "once in a lifetime" is an old rule, and to my knowledge no longer applies. If you meet the two-year ownership and use tests for a principal residence, and don't sell more than one principal residence in any two-year period, you can exclude any capital gain tax on the sale up to the $250k/$500k limit. So it would be feasible to sell every 2-3 years and take the exclusion each time.

If I am wrong, somebody in tax law or prep please let us know.

I'm going to fully retire in 2014 and relocate. I guess I'm selling before 2013 or I'm kissing about $45K away. This sucks.

Recurvy,

Your post is essentially correct. The "paid them off" part could confuse some people. Folks get confused about tax basis vs. what they owe on the house.

I have to go back and study the basis issue, but I believe if you have a house you acquired under the old rules of excluding gain as you traded up, your tax basis could actually be much lower than your current purchase money mortgage.

Also, except for political purposes, I can't get too flustered by a tax that might start in 2013, because I have 2010-2012 to worry about and plan for. I don't believe the current administration and congressional makeup will survive for that long, and therefore this part of the legislation has a good chance of not being in place in 2013.

Danny, CPA, CFP

Chicago and suburbs have had a 1% sales tax on houses, for years.

Danny, could you check that about the trading up and let me know? (only if you have time). I may have to take a look at that for the property that we plan on selling within the next 3 years.

Fun discussion of future tax rules so far. The link above is the publication on sale of your home. The cutoff for the old rules, about trading up to exclude the gain, was May 7, 1997.

Any 3.8% tax would be on the taxable part of any home sale. So, the part that is taxable, above the $500k exclusion for married couples, which is also above the $250k modified adjusted gross income threshold for married couples, would be taxed at 3.8% extra. That is limited to the total investment income as defined, or the MAGI above the limit, whichever is less.

The interesting part of this is that, apparently, if you incur taxable gain on the sale of your home, it could create the extra 3.8% tax on your other investment income, including interest, dividends, annuities, royalties, rents, other than such income which is derived in the ordinary course of a trade or business, and net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business (extracted from Code Section 1411).

Danny

It's not a sales tax or an income tax. It's a Medicare tax like the one you pay on your salary and business income -except it's a tenth of a percent less. If you deferred gain on previous residences using the old "replacement " rule and you bought your current house prior to 1997, that deferred gain reduced the "tax cost" of your current residence and any gain when you sell it could be a lot more than you think.

Nope, bought it after 2000. I'm good. Thanks, Danny.

I'm single. Bought my house in 1977 for $42000. Refinanced several times over the years to buy cars and other necessities I did not have money for and wanted the tax deduction because of being in the single tax category(which is not a bad thing now but was than). I now owe $140000 on this same home. Is it going to cost me everything if I sell it to pay for other peoples health care under this new rule? I don't understand most of it.

I love summer but November can't get here fast enough for me. In the area of Illinois I live in, around Chicago. WE pay our real estate taxes year after year, when you decide to sell, you need to purchase " tax stamps" the price of which is based on xxx per thousand of selling price.

hoggy,

Your tax basis is $42k plus certain closing costs, plus whatever you have spent for major improvements. You can add things to your tax basis like new roofing. See "Increases to Basis" on page 9 of Publication 523, link above.

If you are single, you can exclude $250k of gain from taxation. If you have no improvements at all since 1977, and no other costs to add to the basis, then anything you net above $292k will be taxable (as long-term capital gains, since you've owned the house more than a year), and subject to the additional 3.8% tax referred to above.

Danny