Today TaxMama hears from Ron who is about to be laid off. He tells us, “I was notified on February 26, 2010 that I was being laid off as of August 2010. I sold my home on May 25th, knowing I wouldn’t be able to afford the mortgage after my layoff. I only lived in the home for 12 months. Will I have to pay capital gains tax or will the layoff exclude me? I only made about $20,000 on the sale of the home, after deducting the basis from the sale price.”
In ordinary cases, David Toelkes’ answer would be right. And he is certainly right about the additional costs that will reduce your realized gain.
However, when it comes to the personal residence exclusion, there is a special deal for “unforseen circumstances.” No longer being able to afford your home due to a layoff is specifically one of those situations – see item (b).
Since you lived in the home for 12 months, you are entitled to half of your $250,000 personal residence exclusion – or half of $500,000 if you are married.
Your $20,000 will not be taxed. You will need that to live on. However, be sure to report the sale of your home on Schedule D. Show the same cost as your sales price – profit being -0-.
The only potential problem is that you sold the house too soon. You may have blown your prorated personal residence exclusion since you are not yet unemployed – and are several months from being unemployed. In fact, it’s even possible (though unlikely) your company’s fortunes might turn around before August. Though, in this market, I can see the wisdom of trying to sell as early as you can.
In which, case, turn back to David’s advice and look for every possible increase in basis and profit reduction.
Good luck finding a new job before the old one runs out.
And remember, you can find answers to all kinds of questions about selling your home and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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