by our US tax adviser, Marc J. Strohl, CPA, Principal at Protax Consulting Services Inc and a Partner at Goldfine Strohl LLC

If you would like to contact Marc for advice, please use our enquiry form

The goal of this article is to provide a comprehensive checklist of information to consider prior to filing a tax return. This article is not designed to teach you the technical competence required to perform self compliance, however it will certainly arm you with the knowledge to determine if your US tax preparer knows all that they should know to provide you with technically competent professional services.

Exclusion rules on Sale of a Principal Residence:

If the home is your “main home” or principal residence in the five year window prior to sale you must have: 1) owned and 2) used or lived in the home for at least two years= 24 months = 730 days for both spouses to qualify for the $250,000 per spouse exclusion.

The two years for the owned and use test do not have to be the same two years within the five years prior to sale. Further the determination of “main home” is made on an annual basis, such that there may be multiple “main home” determinations in any five year window. The use test does not require 730 consecutive days of use, as long as there are 730 days in the corresponding five year window and use may occur during periods of non-ownership. Temporary absences even if rented out are counted as periods of use. Lastly this exclusion may only be used once every two years.

If you do not have the two years for both tests you will not qualify for the exclusion unless: you have a change in location of employment, health reasons or for unforeseen circumstances. In such cases the exclusion is prorated by qualifying days over 730 days.

Obviously the handicap for expats or foreigners here in the US on assignment is that although they usually meet the two year test of ownership they DO NOT meet the test on use.

If the home is NOT your "main home" or principal residence or you do not meet the above tests and you have held the residence for more than one year then the gain would be taxed at the long term capital gain rate, which is currently 15%.

Minimizing the Net Unexcluded Gain on Sale:

They key to minimizing your capital gain on sale subject to the US long term capital gains tax rate, is to minimize your net capital gain. The net capital gain is comprised of the net proceeds less the net costs. By minimizing net proceeds and maximizing net costs, the closer these two amounts become. The closer these two amounts become, the smaller the resultant capital gain. Although gross proceeds and gross costs are readily determinable, the net amounts may be more elusive to calculate. To do this you will need the HUD closing and settlement statements, or the foreign equivalents of these documents.

To maximize the net cost purchase price to the contract price you must add the closing costs- legal, mortgage recording tax, insurance, hazard, transfer tax, etc as per the HUD settlement statement to bump up the cost to your net costs on purchase. To that you would add subsequent improvements and additions.