Do I have to pay tax on the gain from a home sale?

Q: I bought a house in May of 2003 and sold it in October of 2003 with a profit of $41,000. I was an owner of a store and sold it in September of 2003 because of losses and could not pay the monthly mortgage. Do I have to pay tax on the gain of home sale? --Chi

The following answer was provided by Barbara Damon, CPA, Edelstein & Company, LLP.

A: The rules for the exemption of the $250,000 of income from the sale of your principal residence is that you have to have owned it and lived in it as your principal residence for 2 of the last 5 years. And you can't have excluded the gain from another home in the last two years.

There is hardship relief for those circumstances in which you have to sell the house within those time limits so you can get to prorate the exclusion based on the length of time you lived there compared to the 2 years. Hardship relief is available if you have a change in employment and the increased distance to work is 50 miles or more,

for specific health reasons ,

if you are unemployed and eligible for unemployment compensation or

a change in employment results in the inability to pay the cost of housing and basic living expenses.

The following answer was provided by William Austin, CPA, LeDuc and Sikowitz.

A: There is an exclusion to reporting the gain on the sale of your home if it was your personal residence for a specified period.

The exclusion of $250,000 ($500,000 if filing a joint return) is available if the home was your principal residence for two of the five years before the sale.

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: The second response refers to hardship relief - the IRS has issued guidance in recent pronouncements that permits the use of a prorated exclusion amount when circumstances beyond your control, such as loss of your job reduces your income so that you can not pay for the residence. Your situation sounds as though it falls within the areas of relief that the IRS was talking about. Assuming that that is the case, you would multiply the available exclusion amount ($ 250,000 on a single return or $ 500,000 on a joint return) by a fraction made up of the number of days that you owned the residence divided by 730 days (the number of days in two years - the normal, required holding period to qualify for the exclusion). The result is the maximum exclusion you may claim, however, if it is more than the gain you generated, you would only claim exclusion of the gain, in which case, congratulations, you will pay neither federal or state tax, since MA follows the federal rules.

The following answer was provided by Barry Beck, CPA, Barry D Beck, CPA, PFS, DABFA, Bedford.

A: Both transactions are reportable transactions. There are many items to consider in the determination of each gain. If to what extent the gains offset the losses. One must also consider the depreciation recapture on the store. Both transaction could also be reported to the IRS and/or the state.