The following is information from our accountant.  Disclaimer:  Mike & Danielle Davis are not accountants, experts on taxes, or employees of the Internal Revenue Service.  This information is accurate according to the company that does our taxes.

Question: Can you tell me how the sale of a house is exempt from capital gain?

Answer: If you lived in the house for 2 of the last 5 years, the capital gain is exempt up to $500,000.  I am attaching a summary of the law as it has been defined in the last year.

Summary:

Home sale rules liberalized. The IRS has issued new regulations liberalizing key aspects of the home sale exclusion. This exclusion allows an individual to treat as tax-free up to $250,000 of gain from the sale of a home owned and used by him as a principal residence (his main home) for at least 2 of the 5 years before the sale. The full exclusion doesn't apply if, within the 2-year period ending on the sale date, there was another home sale by the taxpayer to which the exclusion applied. Married individuals filing jointly for the year of sale may exclude up to $500,000 of home-sale gain if they meet a number of conditions.

The new regulations liberalize two important rules:

The IRS originally took the position that if a principal residence consistently was used in part for residential purposes and in part for business purposes, only the gain allocable to the residential portion could be excluded. The new IRS regulations adopt a more liberal rule. They provide that all of the gain from the home sale (except for gain resulting from certain depreciation deductions) is eligible for the exclusion if both the residential and non-residential portions of the home are within the same dwelling unit (e.g., one room in the home is used as the office of a sideline business). However, gain is allocated if the non-residence portion of the home is separate from the dwelling unit (e.g., an office in a converted garage).

An individual may claim a partial home sale exclusion if he (1) doesn't qualify for the 2-out-of-5-year ownership and use rule, or (2) previously sold another home within two years. The failure to meet either rule must result from the home being sold because of a change of place of employment, health, or to the extent provided by IRS regulations, other unforeseen circumstances. The new IRS regulations interpret these conditions liberally. For example, the health condition would be met if a person sells his home and moves cross-country to care for an ailing parent. The term “unforeseen circumstances” is defined as the occurrence of an event that the individual didn't anticipate before buying and moving into the home, such as divorce or legal separation, the birth of twins, and change in employment or self-employment status that results in inability to pay housing costs and reasonable basic living expenses.

The new IRS home sale exclusion regulations generally apply to sales after December 23, 2002, but taxpayers may elect to apply them to sales after May 6, 1997, and before December 24, 2002. This election may create a refund opportunity for some home sellers.

To search ALL listed homes for sale in the Des Moines area, go to our Des Moines Iowa Real Estate search page, or our Des Moines MLS search page.