DEAR BOB: In July of 1979, we bought a house where we plan to move after retirement in about a year. At that time, we plan to sell our present home. Our accountant says that to be eligible for the $100,000 "over 55 rule" tax exemption on our sale profits, we must sell our home within 18 months of the day we bought our other home. I know of the 18-month requirement for tax deferral on a sale, but I didn't know it also applies to the once-in-a-lifetime tax break. Is there such a requirement? Robert M., Washington.
DEAR ROBERT: No. It appears your accountant isn't very familiar with the two major home sale tax rules. He seems to be confused.
To qualify for the once-in-a-lifetime $100,000 home sale tax exemption, you or your co-owner spouse must be 55 or older on the day you transfer title to your principal residence. In addition, you must have owned and lived in it at least three of the five years before sale and never have used this tax break before.
That's all there is to it. The rule says nothing about 18 months or buying another house.
However, if your sale profit is over the $100,000 tax-free limit, you can combine this "over 55 rule" with the "residence replacement rule" available to taxpayers of any age.
To qualify for the residence replacement tax deferral rule on your profit over $100,000, you must buy and move to a replacement principal residence within 18 months before or after the sale of your former principal residence. That's what your accountant may be thinking about.
For example, suppose you sell your present home for $175,000, with a $125,000 profit. Subtracting your $100,000 "over 55 rule" tax exemption gives a $75,000 "adjusted sales price." Using the residence replacement rule, if you buy another principal residence for at least $75,000, you must defer paying tax on the $25,000 potentially taxable profit. To qualify, the replacement home must meet the 18-month time limit. For more details, ask another accountant.