Selling Your Home? Don’t Forget These Tax Considerations!
It is truly a seller’s market! Many homes are selling for more (or significantly more) than what the seller’s paid for the home. If you recently sold your home or if you’re thinking of selling your home, we’d be remiss if we didn’t alert you to the tax implications!
When you file your 2021 taxes, you may be able to exclude all or part of the gain from your home sale from your income. Said more simply: you may not have to pay taxes on the profit! This has the potential to be very beneficial for your tax return, but there are factors you’ll need to consider.
Qualifications for Claiming the Exclusion on Your Tax Return
Before you exclude the income generated by selling your home on your tax return, it’s important to make sure you meet the following qualifications:
1. You need to pass the Ownership and Use Test. This means that during a 5-year period that ends on the date of the home sale, you must have owned and lived in the home as your main residence for at least 2 of the last 5 years.
2. Taxpayers who had a gain from their home sale can claim up to $250,000 of that gain ($500,000 for married filing jointly.) So, if you profited $300,000, you can claim the exclusion on $250,000 and report the gain on the remaining $50,000.
3. If a taxpayer owns multiple homes, the exclusion can only be used on gains from selling the main home. (Taxes will have to be paid on gains from selling any other homes.)
Qualifications for a Reduced Exclusion
It is possible to qualify for a reduced exclusion if you do not meet the Ownership and Use Test. A reduced exclusion means that you can receive less than the full exclusion discussed above. So, if you lived in a house for 1 of the 2 years, your exclusion could be half of the full exclusion (ie. $125,000 for single filers or $250,000 for married filing jointly.)
If you have to sell your house for any of the following reasons, you may be able to take advantage of a reduced exclusion:
Change of employment
Change in health
Other unforeseen circumstances (divorce, multiple births from a single pregnancy, etc.)
Claiming the Exclusion and Reporting the Gain on Your Tax Return
Taxpayers who receive IRS Form 1099-S, which is used to report the sale or exchange of real estate, must report the sale of the home on their tax return, even if there was not a gain.
If you do not qualify for or if you are not going to claim the exclusion, you must report the gain on your tax return.
If your profit exceeds $250,000 for single filers or $500,000 for married filing jointly, the excess needs to be reported as a capital gain on Schedule D.
There may be exceptions to some of the tax rules for individuals with a disability, certain members of the military, in the intelligence community, or in the Peace Corps.
If you sell your home for less than what you paid, the loss is not tax-deductible.
Determining the Basis
The basis is the original cost of the home as well as the cost of any capital improvements that add value, prolong the life of the home, or give it a new or different use. Capital improvements do not include routine maintenance or minor repairs, but do include a new roof, renovated kitchen, swimming pool, etc. Capital improvements increase the adjusted basis, which in turn, decreases the gain.
Along with calculating capital improvements, to determine the basis, you also need to subtract any depreciation, casualty losses or energy credits. Additionally, if you postponed paying taxes on the gains from selling a previous home, this will also need to be subtracted.
For more information about tax rules when selling your home, calculating the adjusted basis, and determining the excluded gain, Publication 523 is a helpful resource. This article from TurboTax talks a lot about determining the basis and also provides helpful examples.
Questions and Comments!
I always welcome your questions and comments! While I believe determining the basis is the responsibility of my clients, I am happy to discuss your taxes as they relate to your home sale. Please comment below or send me an email!