Author: Leon Clinton

The $250,000 ($500,000, if married) home sale gain exclusion break is one of the great tax-saving opportunities.

Unmarried homeowners can potentially exclude gains up to $250,000, and married homeowners can potentially exclude up to $500,000. You as the seller need not complete any special tax form to take advantage. 

To take full advantage of the principal residence gain exclusion break, you must pass two tests: the ownership test and the use test.

• To pass the ownership test, you must have owned the home for at least two years out of the five-year period ending on the sale date.
• To pass the use test, you must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date. 

Key point. These two tests are completely independent. In other words, periods of ownership and use need not overlap.

If you’re married and you and your spouse file your tax returns separately, you can potentially qualify for two separate $250,000 exclusions.

If you’re married and file jointly, you qualify for the $500,000 joint-filer exclusion if:

• either you or your spouse pass the ownership test for the property and 
• both you and your spouse pass the use test. 

When you file jointly, it’s possible for both you and your spouse to individually pass the ownership and use tests for two separate residences. In that case, you and your spouse would qualify for two separate $250,000 exclusions. 

Each spouse’s eligibility for the $250,000 exclusion is determined separately, as if you were unmarried. For this purpose, a spouse is considered to individually own a property for any period the property is actually owned by either spouse.

The other big qualification rule for the home sale gain exclusion privilege goes like this: the exclusion is generally available only when you have not excluded an earlier gain within the two-year period ending on the date of the later sale. In other words, you generally cannot recycle the gain exclusion privilege until two years have passed since you last used it. 

You can claim the larger $500,000 joint-filer exclusion only if neither you nor your spouse took advantage of it for an earlier sale within the two-year period. If one spouse claimed the exclusion within the two-year window, but the other spouse did not, the exclusion is limited to $250,000.

As you can see, there’s much to know about the home sale exclusion. If you would like to discuss how the exclusion would work for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 22, 2021

If you own rental properties that can provide you tax shelter with their losses and your Form 1040 adjusted gross income is less than $150,000 (without considering rental losses), you need to overcome the tax code passive loss rules.

Here are some important points.

Keep a time log. Make sure your time log proves you pass the

1. more-than-half-your-work-time test,
2. more-than-750-hours test, and
3. material participation tests for each of the properties, or group, if you elected to group them.

Tax law contains seven possible material participation tests. You materially participate in a property if you pass any one of the seven tests. But realistically, it’s likely you have only two of the seven tests that apply, as follows:

1. You (and your spouse, if married) materially participate in a rental if you perform substantially all the work on the rental.
2. If others participate in the rental, you (and your spouse, if married) materially participate if (a) you participate in the rental 100 hours or more and (b) no other individual participates more than you.

Consider this example. You rent out a single-family home. You hire a gardener who comes weekly to mow the lawn and take care of the landscaping.

To materially participate in this rental

• you must materially participate for 100 hours or more, and
• that must be more than the gardener spends working on this rental home.

Do you have proof? You need proof of not only your work time but the work time of your gardener.

If you would like to discuss your rental properties, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 18, 2021

When you travel to a business location where you spend the night, you are in travel status. But will the tax rules make this a business or personal night?

The rules also affect your costs during the day. When you have an overnight business travel day, you generally deduct your costs of sustaining life for the day, such as breakfast, lunch, dinner, snacks, drinks, lodging, and taxis.

Business days also are important in determining how much of your travel cost you may deduct. For example, on a seven-day trip to London, one business day makes the airfare deductible.

Yep, you heard that right. Six personal days and one business day in London—you deduct 100 percent of the airfare.

Transportation days are the trickiest days. 

Days spent traveling to or returning from a destination outside the United States are treated as business days—provided you use a “reasonably direct route” and you don’t engage in “substantial diversions for non-business reasons” that prolong your travel time.

If you don’t use a reasonably direct route, you count as business days the amount of time that a reasonably direct route would have taken. 

Similarly, if you engage in substantial non-business diversions, you count as business days the amount of time it would have taken without such diversions.

These rules apply to whatever mode of transportation you use. So if you travel by airplane and don’t take a reasonably direct route, you count as business travel days the number of days an airplane would take to reach your destination by a reasonably direct route. The same is true for travel by car or cruise ship.

Once you are at your business travel destination, if a Saturday, a Sunday, a legal holiday, or another reasonably necessary standby day intervenes while you endeavor to conduct your business with reasonable dispatch, you treat such a day as a business day.

If you have questions about your business travel, please don’t hesitate to call me.

• By Leon Clinton
• August 13, 2021