BK+L e-news Bulletin
There's No Place Like Home... Until You Sell It
By James Pepa, CPA Partner
A home is often a person’s most valuable capital asset. But what happens tax-wise when you sell your home?
The tax rules around sales of personal residences have changed numerous times in the past. Gone are the days when you had to reinvest the proceeds from the sale of your home in a new home within a certain amount of time. The current rules are such that, unless you have a significant gain on the sale of your primary residence, you may not even have to report the sale on your tax return.
You are not required to report the sale of your main home on your tax return unless:
- You have a gain and are not qualified to exclude all of it.
- You have a gain and choose not to exclude it.
- You received Form 1099-S.
And even before you can apply these rules, you need to know the IRS definition of ‘main home,’ not to mention determining whether you have a ‘gain’ on the sale and if you can ‘exclude’ any of it.
Your main home is the home you live in most of the time, and can be a house, houseboat, mobile home, co-op apartment or condominium. If you own more than one home, some factors to use in determining which is your main home are:
- The amount of time you live in each home.
- Your place of employment.
- The location of your family members’ main home.
- Your mailing address for bills and correspondence.
- The address listed on your income tax returns, driver’s license, car registration and voter registration.
Single filers may exclude up to $250,000 of gain on the sale of their home. That amount goes up to $500,000 for married couples. You must have owned and lived in the property as your main home for at least 2 years during the 5 year period ending on the date of sale, and the 2 years do not have to be consecutive.
Calculating gain is another adventure in and of itself. You start by figuring the difference between what you paid for your home and the price at which you sold it. The IRS terms are ‘amount realized’ and ‘adjusted basis.’ The amount realized is the selling price minus selling expenses such as commissions, advertising fees, and legal fees. The adjusted basis is the amount you paid for the home originally plus settlement fees and closing costs. You can also add in the cost of permanent improvements you made to the home. If you did not buy your home, but received it as a gift, inheritance, in trade or from your spouse, different rules apply. Things can get even more complicated if part of your home was used for business purposes or treated as rental property.
And what if you lose money when you sell your home? Generally, losses incurred from the sale of your residence are not deductible.
The issues discussed here are just the basics. Navigating all of the tax rules regarding the sale of your home can be tricky. Please contact us if you have questions at firstname.lastname@example.org or 847+866+6800.