Home Exclusion

| August 24, 2016
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A question that comes up often, is what are the tax consequences when I sell my home? Some of you have large gains on your home and would like to know how the tax is handled on the gain.

There is good news on this; a single taxpayer can exclude up to $250,000 in profit when they sell their primary residence, and a married couple can exclude $500,000. Even unmarried co-owners are each eligible for this $250,000 exclusion. Now that we have your attention, let’s look at the details:

To qualify for the $250,000 exclusion, you must meet both of the following requirements: you must have owned and lived in the home for two out of the last five years, and you cannot have excluded gain on another main home during the preceding two year period.

Let’s take a look at a few scenarios:

  • In 1990, Eric is a single taxpayer, and buys his primary residence for $100,000. In 2015, Eric sells his home for $350,000 after living there the entire time. In this case Eric has a gain or profit of $250,000 on the sale. Eric can exclude the entire gain of $250,000 from his income since he meets the two-year ownership test and the two-year use test. Eric’s good to go!
  • In 1990, Eric is a single taxpayer, and buys his primary residence for $100,000. In 2015 Eric sells his home for $400,000 after living there the entire time. Now Eric has a $300,000 gain or profit, but can only exclude $250,000 as a single taxpayer. Eric must report the remaining $50,000 profit as a long term capital gain his 2015 tax return.

Here is one last example:

In 1990, Eric is a single taxpayer, and buys his primary residence for $100,000. So his cost basis is $100,000. Eric later sells it for $400,000 in 2015, netting a $300,000 profit. While Eric lived there, he made $50,000 in home improvements and he has receipts. Eric’s adjusted cost basis is $150,000 because the $50,000 improvements are added to the original cost basis of $100,000 raising his basis to $150,000. Now he has no taxable gain on the sale of his home, since the selling price was $400,000 and his cost basis is $150,000. The gain of $250,000 is excluded from his taxable income.  As you can see, it’s important to keep good receipts when making home improvements. Also, in case you’re wondering, you generally cannot deduct losses on the sale of your main home.

 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

 

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