Qualifications for Tax Exclusion

Filing Individually $250,000 Exclusion

Filing Jointly $500,000 Exclusion


Any two of the last five years

Only one spouse needs to "own" for any two of the last five years to claim the full $500,000


Must be a PRINCIPAL RESIDENCE for any two of the last five years. Occupancy not required on date of sale

Must be a principal residence for BOTH spouses for any two of the last five years. Occupancy not required on the date of sale.


Only one sale every two years. (May be prorated under specific terms.)

Neither spouse has sold a principal residence in the past two years. (May be prorated under specific terms.)


Special Circumstances:

If one spouse dies, the surviving spouse is entitled to the full $500,000 exclusion only if the residence is sold and closed during the same calendar year of the spouse's death. This means that if the husband dies in November, the wife only has until the 31 st of December to sell and close the property if she wants to utilize the full $500,000 exclusion.

Under the new law, there is no "roll over" provision. The taxpayer doesn't have to purchase a more expensive home after the sale of the residence in order to obtain the exclusion. There is no need to purchase a replacement property either.

If either one of the taxpayers has taken the old "one time" exclusion of $125,000 in years prior to the 1997 tax relief act, they can still use the new $250,000/$500,000 exclusion on the sale of their residence provided they meet the test.

Each state has its own tax code in addition to the Federal. Make sure you know what is appropriate in your state.

CAPITAL GAINS TAX - What is basis?

Capital gain is defined as "the excess of net long-term capital gain over net short-term

capital loss for the taxable year" (IRC § 1222 (16)).

"Basis" is the starting point for determining gain or loss.

The basis of the property may be:

a. Its cost

b. Its fair market value at a specified date

c. Its substituted basis

Basis must be adjusted for such items as depreciation and costs of improvements. Basis used to determine the amount of gain or loss upon the sale or exchange of a capital asset. For property acquired by purchase or exchange the basis would be:

The taxpayer's cost - the cash paid for the property or the fair market value of the

property given for it (I RC § 1012).

For property acquired from a decedent there is a

Stepped-up basis - fair market value of the property at the date of the decedent's


This does not apply to "income in respect of a decedent" - normally. the

basis of such income is zero (IRC § 1014 (c).

does not apply to appreciated property acquired by the decedent by gift

within one year of the death where the one receiving the property from the decedent is

the donor or donor's spouse - basis becomes basis of the property in the hands of the

decedent immediately before decedent's death (IRC § 1013 (c)).

The "stepped-up basis" rule applies only to property includable in the decedent's

gross estate for federal tax purposes (IRC § 1014 (b) (9)).

Jointly held property


One who acquired property from a decedent spouse in the case of joint interest created after 1976, who with the surviving spouse has a qualified joint interest in the property (held as tenants by the entirety or joint tenants with right of survivorship, and are the only tenants (IRC § 2040 (b» - receives a stepped up basis equal to one-half of the value of that interest.

Community property:

The stepped-up basis rule applies to the decedent's one-half interest and to the surviving spouse's one-half interest (IRC
§ 1014 (b) (6))

Qualified terminable interest property: upon the death of the surviving spouse, the QTIP property is considered "acquired from or to have passed from the decedent" for the purposes of receiving a new basis at death (IRC
§ 1014 (b) (10).

Capital Gains Implications for the Investor

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum rate

on the net capital gains rate of an individual (net long-term capital gains less net short term

capital losses).

• LONG-TERM is defined as more than 12 months

• SHORT-TERM - is defined as 12 months or less. "Short-term gains" are

taxed at ordinary income rates.


New Tax Law


Dec. 31, 2008

Income Tax
(Top four brackets shown)
















Top Long-Term
Capital Gains Tax




Lowest Long-Term
Capital Gains Tax




Top Dividend Tax