As a homeowner, you should be aware of the tax consequences of selling your home. Knowing the rules can help you minimize any negative tax consequences.
When we think of gains and losses we think of investments like stocks and bonds. What about selling your home? Have you ever wondered what happens when you sell your primary residence? How are the profits and losses recognized? Some of you have big gains on your house if you sell it.
What are the tax consequences of selling your home?
If you sell your principal residence at a loss, you generally can't deduct the loss. If you sell your principal residence at a gain, then it depends on the size of the gain. There’s a good chance you can exclude all or part of the capital gain from taxes.
Now understand, I’m talking about a principal residence only.
When you own your principal residence, it’s considered a capital asset. The sale of a capital asset results in either a cap gain or a cap loss. If the sale price of your home is more than your adjusted basis, you'll realize a capital gain.
Adjusted basis generally means the original cost of your home, plus capital improvements, and subtract out depreciation and casualty losses.
Capital improvements add value and extend the home’s life. Installing a deck or built-in swimming pool would be an improvement. Routine repairs and maintenance are not improvements and are not included in the cost basis of your home.
When can you exclude capital gain from income taxes?
When you sell your principal residence at a gain and meet the requirements, you can exclude up to $250,000 as a single taxpayer. Couples married filing joint can exclude up to $500,000 of the capital gain, regardless of your age.
In general, you can avoid taxes on the gain if you owned and used the home as your principal residence for two out of the five years before the sale (the two years do not have to be consecutive). An individual, or either spouse in a marriage, can generally use this exemption only once every two years.
Assume you and your spouse bought a home for $200,000. You live in the home as your principal residence for 3 years (and file joint tax returns each of those years) then sell the house for $500,000. The entire $300,000 gain is excludable. That means you don't have to report your home sale on your income tax return.
If you cannot meet the two year ownership and use tests or you have used the exclusion more than once in a two year period, you can still qualify for a reduced exclusion. A reduced exclusion may be available under the following conditions:
- Job relocation: there is a 50 mile minimum distance.
- Health problems: to obtain treatment or diagnosis or an illness or injury of an owner or resident.
- Unforeseen circumstances: an occurrence the taxpayer could not reasonably have foreseen, such as disaster, death, divorce, change in jobs, etc..
Selling your home is a major event, but the tax exclusion on primary residences makes the process that much easier!
If you would like more information or would like to schedule an appointment, email us or contact our office at 815-455-6453.
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.