We are Married But File Separate, Are we Eligible for the Home Sale Exclusion?

What is a Main Home?

Your main home is the home in which an individual lives most of the time and can be a house, a houseboat, a mobile home, a cooperative apartment, or a condominium.

Who is Eligible for the Home Sale Exclusion?

To exclude gain, an individual generally must have owned and lived in the property as his or her main home for at least two years during the five years ending on the date of sale. For MFS, each partner can take up to $250,000 of the exclusion amounts provided they fulfill the ownership and use tests. Also, during the two years ending on the date of the sale, they did not exclude gain from the sale of another home.

What Happens If I Sell Land Only?

If an individual sells the land on which his or her main home is located, but not the house itself, he or she cannot exclude any gain he or she has from the sale of the land. 

However, if the individual sells vacant land used as part of his or her main home, and that is adjacent to it, the individual may be able to exclude the gain from the sale under certain circumstances.

What If I Own More Than One Home? 

If an individual has two homes and lives in both of them, his or her main home is ordinarily the one he or she lives in most of the time during the year.

Example: Mona owns two homes, one in California and one in Florida. From 2018 through 2022, Lisa lived in the CA home for 7 months and in the FL residence for 5 months each year. In the absence of facts and circumstances indicating otherwise, the CA home is Lisa’s main home. She would be eligible to exclude the gain from the sale of the CA home and not of the FL home in 2022. 

How Do I Report Rental Income?

For cash-based taxpayers, rental income should be reported on the return for the year the owner actually or constructively received it, regardless of when it was earned. Income is constructively received when it is made available to the recipient, i.e., when it is credited to the owner’s bank account.

For an accrual basis taxpayer, rental income should be reported when earned, rather than when received. Expenses can generally be deducted when incurred, rather than when paid.

How Do I Account for Repairs and Improvements Made On My Rental Property? 

Repairs do not add value to the rental property and therefore are shown as expenses while Improvements add to the value of the property and therefore the cost of improvement must be capitalized. Capitalized costs can generally be depreciated as if the improvement were a separate property.

However, small taxpayers are not required to capitalize as an improvement and therefore may deduct the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements, or similar costs, that fall into the safe harbor election for small taxpayers.

Useful Tips:

  • Improvements add to the adjusted basis of the property while repairs don’t. 
  • Owners should include advance rent in their rental income in the year it was received, regardless of the period covered or the method of accounting they use.
  • Refundable security deposits are not considered as rental income Vs non-refundable ones which should be included in rental income. 

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