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I am helping my mother relocate from Florida after being battered by two direct-hit hurricanes this year. She bought her home for $98,000 back in 1994 and it will probably sell for about $210,000. She intends to buy another home for about $150,000. She told me she has already received a capital-gains tax exemption in the past. She is under the impression that a homeowner can only receive an exemption once. Is this true? Can we be exempt again in our current situation?
Your mom is thinking of the old rules, which allowed a once-in-a-lifetime chance for taxpayers age 55 and older to treat up to $125,000 of home-sale profit as tax-free. Thanks to a change in the rules a few years ago, taxpayers of any age can now claim a tax-free profit of up to $250,000 on the sale of a home ($500,000 for married taxpayers).
And this break can be claimed multiple times, as frequently as once every two years. To qualify, the taxpayer must own and live in the house for two of the five years before the sale. Based on your numbers, all of your mom's profit will be tax-free.
And even if your mom hadn't qualified under the two-year rule, she could still take part of the exclusion because of the hurricanes. A natural disaster is among the IRS's list of "unforeseen circumstances" that give you a partial tax exclusion based on the number of months you've live in the home.
If you're single and have lived in the house for one year, for example, your exclusion is $125,000 since you lived there for half of the two years.
Your mom might also get another tax break from the hurricanes. People who live in a presidentially declared disaster area can deduct unreimbursed losses caused by the storms, which can be very valuable for Floridians who have high homeowners insurance deductibles. To calculate the deduction, you must reduce each loss by $100 and then subtract 10% of your adjusted gross income ($200 since she was hit by two hurricanes). Use our storm damage calculator to crunch the numbers.
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