Selling Real Estate

Taxes

Hopefully, your home has appreciated in value since you bought it, and you will realize a gain on the sale. Homeowners may exclude up to $250,000 in gain from the sale of a principal residence ($500,000 for married taxpayers filing a joint return). The exclusion may not be used more frequently than once every two years. As a general rule, to take the exclusion, the ownership and use test must be met.

  • Own the home for at least two years (if married, it can be either spouse).
  • Lived in the home as your main home for at least two of the past five years (if married, both spouses must meet the use test).

First, you will need to determine the gain. Then, examine the rules for exclusion of gain.

In the case of employer-related relocations, some of your moving expenses may also qualify as tax deductions only if you are a member of the military.

If you sell your house at a loss, Uncle Sam considers this a personal loss and doesn't allow you to deduct it.

SUGGESTION: If you have an older mortgage and are assessed prepayment penalties when you surrender the mortgage, try to have them waived since this is no longer standard industry practice. If you fail, the charges are tax-deductible as mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.

Determining the Gain

When planning for your tax bill, first determine how much of a gain you will realize, starting with the basis of your home.

SUGGESTION: If you are certain that your profit on the sale of your principal residence will not exceed the exclusion amount ($250,000 or $500,000 for married taxpayers filing a joint return), and you qualify for the exclusion, you don't need to calculate the basis of your home.

First determine the basis of the home you're selling. Take the original purchase price and add to it:

  • Fees paid at the closing for title insurance, legal fees, surveys, broker's commissions, etc.
  • The cost of any capital improvements: these are costs that increase the value of your home and extend its useful life, such as adding a room, renovating a bathroom, planting new trees and shrubs in your yard, putting in central air conditioning or a new deck. Costs which are considered repairs and maintenance can't be added to the cost of your home. These are expenses that keep a property in normal operating condition and don't add to its value or prolong its life, for example, fixing a leaky faucet or repainting.

IMPORTANT NOTE: Consult your tax professional if you received your home as a gift, as an inheritance, or in an exchange.


Little Things Mean a Lot

Most folks know that major improvements add basis, but frequently they overlook the small stuff:

  • kitchen cabinets
  • built-in bookcases
  • ceiling fans
  • draperies
  • carpeting
  • fences
  • fire and burglar alarms
  • garbage disposal
  • mailbox & locks
  • radiator covers

and anything else that is attached to the home or property.

IMPORTANT NOTE: If you ever used a portion of your home as a home office, don't forget to reduce your basis by the amount of depreciation taken on the office in prior years.

Second, determine the adjusted selling price of the home:

  • The adjusted selling price is the amount you will sell your home for, reduced by:
  • Selling expenses—such as brokerage commissions, advertising fees, state transfer taxes, attorney fees, etc.

Your gain is the difference between the adjusted sales price and the basis. For example, if your adjusted sales price is $250,000 and your basis is $75,000, you have a gain of $175,000.

Exclusion of Gain for a Personal Residence

Homeowners may exclude up to $250,000 in gain from the sale of a principal residence ($500,000 for married taxpayers filing a joint return). The taxpayer must have owned and used the residence for at least two of the five years ending on the date of the sale or exchange.

SUGGESTION: The exclusion is allowed each time a taxpayer who sells or exchanges a principal residence meets the eligibility requirements, but generally not more than once every two years.

IMPORTANT NOTE: The gain attributable to a home office or the rental portion of a multi-family home is not eligible for the exclusion. The gain attributable to depreciation is taxed at a maximum rate of 25%.

Some other rules that may apply to your situation are as follows:

  • In order to get a $500,000 exclusion, a married couple must file a joint return; either spouse meets the ownership requirement; both must meet the use test; and neither spouse has had a sale in the preceding two years subject to this exclusion.
  • Married couples filing a joint return who do not share a principal residence are each entitled to a $250,000 exclusion.
  • A single person who marries someone that has used the exclusion within two years prior to the marriage would also be allowed a $250,000 exclusion. Once two years has passed since the last exclusion was used by either spouse, the full $500,000 exclusion would be allowed for a subsequent sale of a principal residence.

If a taxpayer fails to meet the two-year requirement due to a change in the place of employment, health or other unforeseen circumstances, the taxpayer may be entitled to a pro-rata amount of the exclusion that would have been available had the ownership and use requirements been met.

Example

Joe and Helen acquired their home in 1989 and sold it on March 1, 2009 for $300,000 (net of closing costs). They paid $50,000 for the home and put $28,000 worth of improvements into it. So their tax basis was $78,000.

Selling Price of Home Bought in 1989

$300,000

Adjusted Basis of Home Sold

$78,000

Gain

$222,000

Exclusion Amount

$500,000

Taxable Gain

$0

As you can see, the rules eliminate a taxable gain for many homeowners when selling a home.

IMPORTANT NOTE: This special rule is only a federal exclusion. You may still owe state taxes. Consult with your tax professional as to the state tax consequences.

Employer-Related Relocations

If you're moving as part of an employer-related relocation, qualified, unreimbursed moving expenses in connection with your employment-related move may be tax-deductible including if you are a member of the military.

 

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