Tax Considerations When Selling your Home by Rick D. Bazzani, CPA
Home prices across the country have hit record highs over the past few years as the number of homes for sale has remained in short supply. While this rising demand has been good news for sellers looking for big profits, it has also resulted in larger tax bills for many. Potential Exclusion of Taxable Gains […]
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Home prices across the country have hit record highs over the past few years as the number of homes for sale has remained in short supply. While this rising demand has been good news for sellers looking for big profits, it has also resulted in larger tax bills for many.
Potential Exclusion of Taxable Gains
By and large, the IRS allows eligible homeowners to exclude from taxable income up to $250,000 of the gain resulting from a sale of their main residence, or $500,000 when homeowners are married and file joint tax returns. To qualify for this benefit, at least one of the sellers must have owned and lived in the home and used it as his or her “primary residence” for at least two of five years prior to a sale. This means the home’s address must be listed on the seller’s driver’s license, tax returns and other identifying documents.
Sellers who own multiple homes may apply this exclusion benefit only to the sale of the one property where they reside for most of the time unless they have a disability, or they are members of the U.S. military. Gains resulting from sales of additional residences generally will be subject to tax unless sellers qualify for an exception.
For example, homeowners may claim the exemption on the sale of a second or third residence when they did not sell another home during the two-year ownership and residence period, or when they did sell another home but did not take the exclusion on the gain resulting from that sale. In addition, sellers who do not meet these eligibility tests may qualify for a partial exclusion on a gain resulting from a home sale when the sale is a result of a change in work location or a health issue.
Limiting Taxable Gains
Considering the recent trajectory of home values, it is likely sellers qualifying for a full exclusion of the taxable gain from a home sale will be subject to some level of capital gains tax. The good news is that current tax law offers sellers some opportunities to limit those liabilities.
For example, sellers generally may deduct from their taxable gain the costs they incur for appraisal fees and real estate commissions related to their home sales. In addition, sellers may have opportunities to increase their tax basis in their homes and, therefore, reduce the amount of gain subject to tax when they make certain home improvements that add value and extend the useful life of their homes. The costs of improvements that homeowners may add to their original tax basis include replacing a roof or existing air conditioning system, installing hurricane-impact windows or a water filtration system, or updating a kitchen.
If the exclusion amount covers all a seller’s taxable gain, he or she need not report the sale on his or her federal income tax return. However, the sale must be reported if the seller chooses not to claim the exclusion or if he or she receives IRS Form 1099-S, Proceeds from Real Estate Transactions. Any sales resulting from foreclosures or forgiveness or cancellation of mortgage debt must be reported by sellers as income on their tax returns. Yet, homeowners who sell their homes for less than the original price they paid to purchase those properties may not deduct the difference from taxable income on their tax returns.
When selling any home, be sure to provide your new mailing address to your professional advisors, accountants, lawyers, banks and financial institutions, insurers and the Social Security Administration. If you need assistance, please contact your tax advisor.
About the Author: Rick D. Bazzani, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides individuals and entrepreneurs with a broad range of tax-efficient estate, trust and gift-planning services. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at firstname.lastname@example.org.
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