PLAN TO SELL YOUR HOME?

PLAN TO SELL YOUR HOME?
Good News!  You May Qualify to Exclude Gain from Income

Your home is likely your single most valuable asset.  Good to know that when you eventually sell it, most of the profit you make won’t go to the IRS.

Will you pay tax on the sale of your home? Now, anyone can exclude up to $250,000 of gain or $500,000 for a married couple filing jointly on the sale of a home. That means most people will pay no tax unless they have lived there for less than 2 out of the last 5 years.

Notably, this is not a one-time tax break … you can use this capital gain exclusion to avoid tax on a home sale repeatedly.

This good news may even prove to be better as there are additional steps you can take to further enhance the tax benefits of selling your home. Read on to figure out how you may qualify.

Three Qualification Tests

There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:

• Ownership: You must have owned the home for at least two years during the five years prior to the date of your sale.
• Use: You must have lived in the home as your principal residence for at least two of the five years prior to the date of sale.
• Timing: During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.

You can use this exclusion every time you sell a primary residence, as long as you satisfy these tests.

Note 1: Homeowners excluding all the gain do not need to report the sale on their tax return. If profit from the sale exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain at tax-filing time.

Note 2: Taxpayers who experience a loss when their main home sells for less than what they paid for it may not deduct the amount of the loss on their tax return.

How to Figure Whether You Have a Gain

You have a gain when you sell your house for more than the original cost that you paid.

If you purchased your home from an existing owner, the price you paid is the agreed to purchase price plus certain settlement and closing costs.

If you built your home, your original cost is the cost of the land, construction costs, architect fees and utility provider hookups.

If you inherited your home, best bet is to check with the executor of the estate to provide you with information about the basis of your home. There are different rules depending on the date of the previous owner’s death.

Your next step is to determine the adjusted basis … the cost of your home adjusted for tax purposes by improvements you’ve made or deductions you’ve taken. Improvements are those that added value to your home, prolonged its useful life, or gave it a new or different use … not included are expenses for routine maintenance and minor repairs. Deductions may include casualty losses, depreciation expenses, and a variety of other costs that may further reduce your adjusted cost basis.

For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.

Important: As with most tax issues, there is more to the story. Best move on your part is to seek guidance from your tax professional.

Summary

Most home sellers don’t even have to report the home sale transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill. Might be best to seek professional help to ensure you’re in compliance.

Give us a call or drop an email to schedule a time to review the specifics of your unique situation.