If you are preparing to sell your home, taxes are probably not the first thing on your mind — and they probably shouldn't be. However, when tax time does roll around, you need to understand what effects your home sale will have on your taxes.
Generally, profits from the sale of your primary home are taxable. However, in many cases you can exclude up to the first $250,000 of gain ($500,000 if your tax status is married filing jointly). To apply this exclusion, you must first verify that your home sale meets the qualifications outlined in IRS Publication 523, "Selling Your Home". Gains that fall under this exclusion are also not subject to the Net Investment Income Tax (NIIT).
To qualify for the exclusion, you:
- need to have owned the home and used it as your primary residence for at least two of the previous five years before the home sale;
- must not have acquired the home through a like-kind (1031) exchange during those five years; and
- must not have claimed exclusion for the sale of a home during the previous two years (you can only exclude gains from your home sale one time every two years).
Exceptions to these rules are outlined in Publication 523, and they cover extenuating circumstances and complicated situations — for example, if the first-time homebuyer credit was claimed during the purchase of the home. Other situations clarified here include the involvement of marriage or divorce, inclusion of adjacent vacant land, sales forced by work/health-related issues or unforeseen events, and sales involving the disabled or military personnel.
To determine your gain or loss, you must know the selling price, the amount realized (selling price minus selling expenses), and the adjusted basis. The adjusted basis includes the total amount you have invested in your home over time (the sale price plus improvements and other changes that added to its value) minus any adjustments against that value (such as casualty losses, credits, depreciation, subsidies, etc.). See Publication 523 for details.
You may not need to report the sale to the IRS if the gain is not considered taxable, but you must report the sale if you cannot exclude the gains or choose not to claim exclusions to which you are entitled. You must also report the gain if you receive Form 1099-S, "Proceeds from Real Estate Transactions," regardless of whether you have taxable gain to report.
What happens if you sell the home for a loss instead of a gain? Sorry, but that loss cannot be deducted on your tax return.
When you do sell your home and resettle in your new one, make sure that you update your address with all parties, including the IRS. By updating your address promptly using IRS Form 8822, "Change of Address" you are less likely to end up with missing tax paperwork. Also be sure to update your address with all employers within the past year, as well as with the Health Insurance Marketplace (if you purchased your insurance through there and are moving out of the current plan coverage area).
The 2017 Tax Cuts and Jobs Act (TCJA) did not make any changes to the process of reporting your home sale or to the structure of the capital gains tax system. However, it did lower the top tax bracket to 37%, which applies to short-term capital gains on assets such as your house that you've held for less than a year.
For any further information that isn't covered in Publication 523, check with your local IRS office. They can help to clarify your specific situation.
Don't fail to take any opportunity to reduce your taxes based on lack of information, especially on such a large transaction as a home sale. A few moments of research could pay off with large tax savings that you can rightfully claim.
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