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Home sales and tax consequences: myth and reality

Selling a house is not as easy as it once was, before the real estate crisis. Amid the landscape of underwater mortgages, foreclosures and other pain points, actually closing the deal to sell your home is definitely an accomplishment.

Wherever you are in the sale process, you may have to confront misconceptions about the tax consequences. This post will describe how some of the myths out there differ from reality. The effect of these differences on individual income taxes can be considerable.

Consider, for example, the notion that the capital gains exclusion from income is available only if the proceeds from the sale of a home are invested in a new one. It's true that this, under prior tax law, the exclusion could only be claimed for proceeds of the sale of a house if those proceeds were used to buy another one within two years.

But that was prior law. The so-called "rollover rule" has not existed since 1997. That was 15 years ago. So it is high time that the myth of a rollover requirement to get the capital gains exclusion be dispelled.

There's also a misconception out there about a minimum age threshold to use the capital gains exclusion. Again, it's true that under prior tax law, a taxpayer had to be 55 or older to claim an exclusion from income for proceeds from the sale of a house. The old law also specified that this was available only once in a lifetime, with a $125,000 limit.

This, too, has changed. Since 1997, there is no age threshold for claiming a capital gains exclusion for sale of a house. Nor is there a limit of only using the exclusion once in a lifetime.

These are only two examples of how myths and misconceptions can linger on, despite their divergence from a new reality. Tax law certainly has its share of these, as readers of this blog know.

Source: "9 Tax-Related Myths About Selling Your Home," Forbes, Kelly Phillips Erb, 10-10-12

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