Pennsylvania Sale of Your Principal Residence and PA Personal Income Tax Implications Brochure

Sale of Your Principal Residence and PA Personal Income Tax Implications Brochure
Brochure: Sale of Your Principal Residence and PA Personal Income Tax Implications (REV-625)
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SALE OF YOUR
PRINCIPAL RESIDENCE
AND PA PERSONAL INCOME
TAX IMPLICATIONS

What is a residence?
A residence is a house, lodging or other place of
habitation, including a trailer or condominium that:
• Has independent or self-contained cooking,
sleeping and sanitation facilities;

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• Was used and physically occupied by a taxpayer
for residential purposes; and
• Was not occupied or used by a taxpayer on a
sporadic and transient basis, or only for a definite
and promptly accomplished purpose.

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What are the requirements to exclude from
PA-taxable income the gain from the sale of a
principal residence?
The seller(s) must meet these four requirements:

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(1) Date of Sale: The sale of the principal
residence must be after Dec. 31, 1997. The date of
the sale is the date the buyer accepts the deed and
the title passes from the seller to the buyer, usually
the date of settlement.

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Generally, homeowners who owned and used
their homes as principal residences for at least
two of the five years prior to the date of sale will
qualify for exclusion of the gain from the sale of
a personal residence from PA taxable income.

If the seller postpones delivery of the deed, the sale
is the date possession and the burdens and benefits
of ownership pass from the seller to the buyer.
For a condemnation, the date of the sale is the date
the taxpayer receives the condemnation proceeds.
For destruction or casualty loss, the date of sale is
the date the taxpayer receives the casualty
insurance proceeds or damages.
(2) Use: The law requires that a taxpayer used the
residence as the principal residence for a total of
at least two years during the five-year period
preceding the date of sale.
Example: John bought a house in Harrisburg on
Jan. 1, 2001. He lived there until July 1, 2002. He
changed jobs and moved to Pittsburgh in July 2002,
but he maintained his Harrisburg home. He did not

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REV-625 PO (04-15)

rent it or use it for any other purposes. He moved
back to his home in Harrisburg in 2003 and lived
there until he sold it in 2005. John meets the
requirement for using his house as his principal
residence for at least two years during the five-year
period preceding the sale.
If John had never moved back to his Harrisburg
home, he would not meet the use requirement for
this exclusion. Even though he never rented his
house or used it for any other purpose, John would
have to pay PA income tax on any gain he realized
from the sale of his Harrisburg home.
(3) Ownership: The law requires that a taxpayer
owned the residence as a principal residence for a
total of at least two years during the five-year
period preceding the date of sale.
Example: Mary leased one-half of a house in State
College and resided there since 2000. In 2002, she
bought the entire property and used it as her
principal residence until she sold it in 2005. Mary
meets the ownership requirement for this exclusion.
However, if Mary had bought the house in 2004, she
would not meet the ownership requirement.
Important: The taxpayer does not have to
meet the use and ownership requirements
simultaneously, but the taxpayer must meet
both during the five-year period preceding the date
of the sale.
(4) Prior Sale: To qualify for the exclusion, the
taxpayer could not have sold another principal
residence within the two years preceding the date of
sale of the current residence.
Example: Rob and Ann owned and lived in a house
in Johnstown. In February 2002, they moved to Erie
and bought a new house. In August 2002, they sold
their Johnstown home. They owned and used the
Erie home as their principal residence until they sold

it in June 2005. They meet all the requirements for
this exclusion.
However, if Rob and Ann sold their Johnstown home
in August 2003, they would not meet the prior sale
requirement for the Erie house’s exclusion. They
owned and used their house for at least two years
during the five-year period preceding the sale, but
they would have sold their principal residence
within two years of the sale of their next principal
residence.
What if a taxpayer meets the use and
ownership requirements, but sells his or her
principal residence within two years of selling
his or her next principal residence?
The taxpayer will not qualify for the exclusion.
However, if the principal residence is sold due to an
unforeseen change in employment, health or severe
financial hardship, a taxpayer could qualify for
the exclusion. An unforeseen change is one caused
by accident, illness, loss of property, casualty or
another unexpected event beyond the control
of the taxpayer.
Example: If in the previous example Rob and Ann
sold their principal residence in Erie because Ann’s
employer relocated her to Williamsport, they would
qualify for the exclusion from the two-year prior
sale provision based on an unexpected change in
employment.
If a taxpayer owns more than one home,
which is the principal residence?
The principal residence is the home that the
taxpayer physically occupied and personally used
most during the five years preceding the sale
of the residence. Moving furniture and personal
belongings into a residence does not qualify as use.

Even if the taxpayer’s family physically occupied
the residence, it is not the taxpayer’s principal
residence if he or she did not occupy it.
Example: Bill and Helen purchased a home in
Pittsburgh in January 2001, and Bill began working
in Philadelphia in March 2001. He leased an
apartment there and commuted to Pittsburgh on
weekends, holidays and vacations. In January 2005,
they sold their Pittsburgh residence. Helen meets
the use and ownership requirement for the
exclusion, but Bill does not. He meets the ownership
requirement, but does not meet the use requirement. He only used his Pittsburgh home for three
months in 2001. His principal residence was his
apartment in Philadelphia. If they elect to file
separate PA tax returns, Helen qualifies for the
exclusion on her half of the gain, while Bill must pay
PA personal income tax on his half of the gain.
If they file jointly, since one spouse met the four
requirements, they both qualify for the exclusion.
What if one of the homeowners die?
The authorized representative of a decedent may
not claim this exclusion on the final PA tax return
of an otherwise qualifying decedent, unless
the decedent closed the sale before death. The
decedent’s estate or trust may not exclude the gain
on the sale of the decedent’s principal residence.
What if the taxpayer sells the principal
residence on an installment basis?
If the owner meets all four requirements,
an installment sale qualifies for this exclusion.
What if a principal residence is a mixed-use
property (partly used for business, commercial,
industrial, rental, investment or other nonwww.revenue.pa.gov

residential purposes) – Could the taxpayer still
qualify for the exclusion?
The taxpayer may be able to exclude a portion of
the gain. Gain is determined separately on the
portion of the property used for residential
purposes and the portion of the property used for
other purposes. The gain that is attributable to the
property used for nonresidential purposes does not
qualify for the exclusion.
What is a mixed-use property?
Examples of mixed-use property include the following:
• A sole proprietor’s residence above his retail store;

How could one spouse qualify and the other not?
If a couple files a joint return and at least one
spouse qualifies for the exclusion, they will both
qualify. However, if they file separate returns,
then they each must qualify for the exclusion
individually.
Example: If one spouse lived in an assisted-living
facility for the four years immediately preceding the
sale of the residence and the other spouse lived in
the residence, the spouse that lived in the assistedliving facility does not qualify and must pay tax on
his or her share of the gain. The best way to avoid
this situation is to file a joint PA income tax return.

• A duplex where the owner rents one unit and
lives in the other; and

If the requirements for the exclusion aren’t
met, how is gain reported?

• An office or licensed daycare facility located
within a residence.

Gain or loss is reported on PA Schedule D.

Mixed use also includes property where the land
surrounding the residence is more than the
taxpayer reasonably needs for a residence. The land
surrounding a farmhouse that the taxpayer uses for
commercial agriculture, livestock breeding or dairy
purposes is not necessary for residential purposes.

The department supplies a worksheet that assists
in calculating a gain on the sale of a principal
residence and the taxable portion. The PA-19
worksheet and instructions are available on the
department’s website, www.revenue.pa.gov, or by
calling 1-888-PATAXES.

What if some time during the period a taxpayer
owned a home, a portion of the residence was
used as a business in the home?

If a taxpayer sells a house and qualifies for
a full exclusion of the gain, is he required
to report any information on/with the PA-40
tax return?

If a taxpayer received or was entitled to a
depreciation deduction for having an office in the
home, for PA purposes or not, that portion of the
home does not qualify for the exclusion. A taxpayer
that claimed and received allowable office-at-home
depreciation may not exclude the gain on that
portion of the principal residence. This applies even
if the taxpayer stopped claiming the office-at-home
expenses.

If a taxpayer is eligible for Tax Forgiveness without
reporting any gain from the sale of a principle
residence, he is required to include the gain from
the sale of the home on Line 8 in Part C of PA
Schedule SP, Special Tax Forgiveness, in the
determination of eligibility income. Otherwise,
taxpayers qualifying for the full exclusion of the gain
are not required to report or include any additional
information or forms with PA-40 income tax returns.
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