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Home Sweet Home: Ownership has tax advantage

When you sell a house, you are normally required to include the profit you made from the sale as income on your tax return.

For regular tax payers, this income may be excluded when certain ownership tests are met. Taxpayers may qualify to exclude from income in 2006 all or part of any gain from the sale of their main home -- the home in which they lived most of the time -- up to a limit of $250,000 or $500,000 on a joint return, in most cases. This means that, if a taxpayer qualifies, he or she will not have to pay tax on the gain up to the limit.

To claim this exclusion, a taxpayer must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, a taxpayer must have owned the home for at least two years (the ownership test), and lived in the home as the main home for at least two years (the use test).

A military taxpayer on qualified official extended duty in the armed services may suspend the running of the five-year ownership-and-use period before the sale of a residence for up to 10 years of such duty time.

According to the IRS, this means that you may be able to meet the two-year use test even if, because of your service, you did not actually live in your home for at least the required two years during the five-year period ending on the date of the sale. This applies when the duty station is at least 50 miles from the residence - or while the person is residing under orders in government housing - for a period of more than 90 days or for an indefinite period.

This election, which is an option for the taxpayer, applies to only one property at a time. The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the five-year test period can be as long as, but no more than, 15 years.

For example, if you live in your house for one year and then you PCS, you can suspend the running of the five-year period. If you move back into the house later, you can pick up the five-year period where you left off, as long as you were not gone for more than 10 years. If you then live in the house for one year, you will meet the test for exclusion of the income. One year of residence prior to PCS and one year of residence after your return meets the two year requirement of the use test, said Capt. Patrick Hartman, 314th Airlift Wing Assistant staff judge advocate.

For more information, refer to IRS Publication 523, Selling Your Home, available at www.irs.gov
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