The Tax Professionals Blog — home sale

Individuals wanting to purchase a home frequently look to their IRA accounts as a source for the down payment. Although tapping one’s retirement funds is generally not a wise thing to do, many homebuyers do it anyway. In these situations, there is not much that can be done about the taxability of an IRA distribution, which depends upon whether it is a Traditional IRA, which may or may not have a basis created by non-taxable contributions, or a Roth IRA. However, there is a somewhat complicated exception that can avoid the 10% early withdrawal exception on a portion of the withdrawal.  

A reduced exclusion applies to any sale or exchange if a taxpayer doesn’t meet the ownership, use or once-every-two-years requirements due to a change in the place of employment, health or (to the extent provided in regs) unforeseen circumstances.  The reduced exclusion applies if any of the following are true:  

Background: A frequently encountered issue is when an elderly parent turns the title of his or her home over to a child or other beneficiary and continues to reside in the home. This situation raises important questions: How is a future sale of the home treated if it is sold before the parent’s death (will Sec 121 apply?), and is a gift tax return required? Or if the parent passes away while still residing in the home, does the beneficiary use a gift basis or the FMV on the date of death? What is the tax result if the parent moves out of the home?