Few people expect helping a family member to require them to become a bit of a tax expert, but many of us find ourselves navigating major financial decisions.
Your real estate attorney or financial advisor may not offer up information about the tax breaks you’re due as a family caregiver. Asking them if you qualify can save you thousands of dollars of taxes you don’t need to pay!
If you’re about to sell your home or the home of a family member because of their health, read this first and talk to your real estate lawyer and accountant.
We also have tips to share on how to get a home ready to sell. Many caregivers find themselves in charge of selling houses that haven’t gotten a face-life in a while and we need to get the best price for it that we can!
The capital gains tax exclusion
Many people are aware of the capital gains tax exclusion on your primary residence. If you’ve lived in your home for 2 out of the 5 years before you sell it, you don’t owe taxes on the first $250k of capital gains. If you’re married, that number jumps to $500k. That means if your home sells for more than what you bought it for, you don’t owe any taxes on the first $250k or $500k of profits.
Any money you spent increasing the value of the home –like an addition or upgrades, but not routine maintenance — counts toward the original price you paid. So, if you bought a home for $100k, spent $25k in renovations, and sold it for $250k, the IRS sees $125k as the price you paid for the home and you get $125k in tax-free profit.
If you own your home with someone you aren’t married to, you can each claim the $250k tax exemption, for a total of $500k, as long as you both qualify.
You can only use this capital gains tax exemption on your primary residence once in any two year period. However, this requirement is waived if you move twice in two years because of a change of employment, health, or other unforeseen circumstances.
This tax exempt status is incredibly important for everyday Americans who own their home. It helps families support themselves in retirement, pay for college, cover major health care expenses, and climb up the economic ladder.
What if you don’t meet the requirements?
There are many reasons why you may buy a home and have to sell it before you’ve lived in it for two full years. The IRS isn’t known for being a caring institution, but it does try to help family caregivers who need to move. That’s why they waive the requirements if you have to move because of a change of employment, health, or other unforeseen circumstances.
The IRS will grant you a reduced tax exclusion for quite a few caregiving related reasons.
You qualify for a reduced capital gains tax exemption if:
- You can no longer afford to stay in your home because your caregiving has required you to cut back your hours, quit your job, or resulted in you losing your job.
- If you’ve gotten a job transfer or taken a new job to be closer to a loved one who needs support. This generally needs to be more than 50 miles from your old home.
- Your home is not suitable for a family member because of their disability.
- A family member needs to move in with you for health reasons and your home is not large enough to accommodate them.
- If you moved to be closer to a treatment facility for yourself or a family member.
- If the climate of the area you lived was not suitable for a family member’s health.
- Anyone in your household has passed away.
- Anyone in your household has lost their source of income.
- You and your spouse get divorced.
- You’re forced to move because neighbors object to a family member’s mental or physical disabilities.
- A family member requires a service animal and your condo prohibits animals.
A family member, in this case, is your spouse, any children or step-children who live with you, a co-owner of the home, anyone who lives with you, a parent or step-parent, grandparent, grandchild, sibling or step-sibling, your in-laws (including siblings), aunts or uncles, nieces or nephews, and cousins.
If you’re selling a family member’s home for them, they can qualify for a partial capital gains tax exclusion if:
- They need to move into a residential care facility for physical or mental health reasons and have lived in their home for one full year.
- They have become disabled and their home is not accessible.
- Their neighbors object to their mental or physical health issues.
- They can no longer afford their home because they’ve lost their income or their income has been reduced.
- Someone in their household has passed away.
- They’ve gotten divorced and can no longer afford their home.
- They require a service animal and their condo prohibits animals.
You’ll want to get a letter from your doctor to support your need to sell the home in case you’re audited.
If the home owner requires residential care
If your spouse or another family member owns the home you live in, they can include any time they were living in a licensed assisted-care facility as part of the two years, as long as they lived in the home for a year in the 5 years before the sale. If your parent buys a home and lives in it for a year before having a health issue that requires you to place them in a nursing home, they can claim the tax exemption as long as you sell the home within 4 years of when they’re moved to residential care.
If your spouse has died
If you’re selling your home because your spouse has passed away, you can claim any period of time your spouse has owned and lived in the home as if you had lived there and owned it, too. So if you were married less than two years ago and moved into a home your new spouse had owned and lived in for more than two years, you can claim the full capital gains tax exclusion when you sell the home.
If you sell the home the year your spouse passed away, you can file your taxes jointly with your deceased spouse and claim the full $500k exclusion. If you wait and sell the home in a future year, you can only claim your $250k exclusion.
What’s the reduced exemption?
The reduced capital gains tax exemption on your primary residence is determined by a formula.
Maximum capital gains tax exclusion multiplied by the number of days divided by 730
The maximum exclusion is either $250k (if you’re single) or $500k (if you’re married).
The number of days is:
- the number of days you owned the home and it was your primary residence
- the number of days you used the home as your primary residence
- the number of days between when you used the capital gains tax exclusion for a prior home sale and the date of the current sale
You use whichever of the three options is the fewest days.
730 is the number of days in two years.
Let’s say you and your spouse bought a home and a year and a half later, your sister-in-law is in an accident and needs your support. You and your spouse decide to sell your home and buy a new home that’s accessible for her needs. You’d be eligible for a partial capital gains tax exclusion. The math would look like this:
500,000 x 547.5 / 730
273,750,000 / 730
In this instance, you won’t owe taxes on the first $375k of proceeds from the sale of your home.