HOW TO HANDLE HOME ON TAX RETURN

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, February 29, 1992                   TAG: 9202290110
SECTION: BUSINESS                    PAGE: A-6   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium
HOW TO HANDLE HOME ON TAX RETURN
A home is more than just a shelter. For millions of Americans it is the best tax shelter going.
Most homeowners are aware of the deductions allowed for mortgage interest and real estate taxes. Another tax break can be just as beneficial when a home is sold: You may be able to avoid capital-gains taxes on the profits.
You must report to the Internal Revenue Service when you sell your home, whether your made a profit or lost money. Use Form 2119 and file it with your tax return. Be sure you make thorough records on all home-related transactions and keep them for as long as you live.
In general, any profit from the sale of your principal home is considered a capital gain and subject to taxation like most other kinds of income.
But there are two big breaks for home-sellers. Here are details:
If you sold your principal home in 1991 and bought a new home costing at least as much as what you sold the old one for, the tax due on the entire profit is deferred. But you must buy and move into the new home within two years of the date you sold the old one. There are special rules on this for military personnel.
But if the new home cost less than the selling price of the old one, you will have to pay tax now on part of the gain.
To help calculate any profit, here are three important terms to know:

Basis. In general, this is the price you paid for the old home. The figure can be adjusted over the years, depending on what you do to the home. For example, adding a room increases the basis. A tax-deductible uninsured casualty loss, such as a fire, lowers the basis. When you eventually sell your home, the higher the basis, the less gain there is to tax.

Fix-up costs. Money spent for work that makes it easier to sell your home. The work must be done no more than 90 days before you sign a contract to sell and be paid for within 30 days after the sale. These costs are considered when you calculate how much profit from the sale is tax-deferred.

Adjusted sales price. This is the price for which you sell your old home, minus fix-up costs and such expenses as broker commissions, title insurance and attorney fees.
Publication 523, free from the IRS, tells how to calculate and report the gain on the sale of your home. Here is a simplified example of how it works:
Assume you bought a home in 1984 for $90,000 and the following year added a $5,000 pool, resulting in an adjusted basis of $95,000. You sold that home in May 1991 for $130,000. Subtracting $8,000 of selling expenses nets a realization of $122,000 on the sale. Subtracting the adjusted basis leaves a realized capital gain of $27,000.
From the $122,000 realization you could also subtract $7,000 for painting, carpet replacement and other fix-up costs to make the house ready for sale. The result is an adjusted sales price of $115,000.
The new home you bought in May 1991 cost $108,000, which is $7,000 less than the adjusted price of the old one. You owe tax on the smaller of the gain realized from the old home - $27,000 - or the amount by which the adjusted price of the old home exceeds the cost of the new one - $7,000.
That means you report a $7,000 capital gain on Schedule D. The $20,000 that is not taxed as 1991 income is subtracted from the $108,000 cost of your new home, leaving an adjusted basis on that home of $88,000.
You will go through similar calculations when you sell the new home.
If the price of the new home in this example had been higher than the $115,000 adjusted sales price, taxation on the entire capital gain would have been deferred.
If you or you spouse were 55 or older on the date you sold your old home, the first $125,000 of gain from the sale is tax-free forever. However, this benefit may be used only once in a lifetime. And if one spouse used the tax break in an earlier marriage or while single, it is no longer available.
The property must have been your principal home for at least three of the last five years before the sale.
Taxation of the gain exceeding $125,000 may be deferred.

by Bhavesh Jinadra by CNB