Tax Considerations When Selling Your Home

When it comes to selling a home, everyone wants to make a profit! However, many homeowners don't fully understand the tax implications of a home sale, or when that profit turns into taxable income. So, we wanted to offer a few things you should be thinking about when selling a home.

Gains vs. Losses

Individuals who sell their main home and receive a profit may be able to exclude up to $250,000 of that gain from their taxable income. Taxpayers filing a joint return with their spouse may be able to exclude up to $500,000. That’s no small chunk of change!!!

It’s important to note that taxpayers who own more than one home can only exclude the gain on the sale of their main residence. They must pay taxes on the gain from selling any other home (vacation home, rental property, etc.).

Profits from real estate are reported on Form 1040 Schedule D, Capital Gains & Losses. Sadly, selling a home doesn’t always mean you make money. Some people experience a loss when their main home sells for less than what they paid for it. As you might expect, this loss is not deductible.

Remember, calculating a gain or loss on your home sale involves more than just the purchase price. The cost basis on your home includes purchase price, purchase costs, improvements and selling costs. You actually subtract these from the final selling price to determine your net gain or loss. For this reason alone, it’s REALLY important to keep all records from the very moment you purchase your home. These will come in handy when trying to offset any gains you may have!

And, please don't confuse the taxable gain or loss with how much money you might actually walk away from the sale with. The taxable profit is based on the selling price minus your cost basis, while the cash profit is based on the selling price, less closing costs and less any mortgages due.  The two are not the same. 

How Do I Qualify?

In order to exclude gains from your taxable income, you simply need to own the home and have lived in it for at least two years out of the last five – and they don’t even need to be consecutive! However, there’s a catch (there’s always a catch, right?)... something we call the “two-out-of-five-year rule”. You must have owned the home for at least five years prior to the sale, and lived in it (meaning you “slept in it”) for 24 months during those five years. Pretty simple!

But as with most things, there are exceptions to the rule. For example, if you’ve lived in the home for less than 24 months, you may still be able to exclude a portion of your gain if certain conditions apply. Moving for a job, natural disasters or selling the home due to medical reasons are good examples. In cases like these, it’s a really good idea to contact us so we can help determine what exemptions you may qualify for.

Taxpayers who can’t exclude all of the taxable profit from their income must actually report gains from the sale when they file their tax return using Form 1099-S. If you get a 1099-S from the sale of a home, you have to report the income and show it to be excluded from tax, even if there's no tax due.  Otherwise, the IRS computer matching program will assume you didn't report all your income and bill you for tax in the total amount of the home sale, plus interest and penalties. Worksheets included in Publication 523 can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale, and the excluded gain on the sale.

If you have questions about the tax implications of selling your home or need help calculating your net gain/loss, please CONTACT US right away. We’re here to help!