How to Deal with the Gains from Your Home Sale

When you sell your home, you are essentially collecting capital gains if you make any profit from the sale of your home. While this could be a potentially stressful time, it also has tax implications in terms of reporting and paying the taxes on those potential profits. But there are also ways to mitigate the tax liability from a home sale. By consulting with a tax professional or accountant, such as Allan J Rolnick, CPA in Forest Hills, NY, you can determine what will work for your particular circumstances. Below are a few key points to keep in mind.

Criteria for Home Sale Gain Exclusion

There are three different criteria that you must meet in order to take the home sale gain exclusion. If these criteria are not met, then the gains or profit from the sale of the home will need to be taxed as either short- or long-term capital gains.

• Ownership – Must have owned the home you are selling for at least two years during the five years prior to the sale
• Timing – You must not have excluded the gain on another home sale within the two years prior to the current sale
• Use – You must have used the home as your principal residence for at least two of the five years prior to the sale. These two years do not necessarily have to be consecutive.
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Another point to note is that if you are married, you will need to file jointly and at least one of you need to have owned the house for the required amount of time. However, there may be exceptions where you might have met the criteria but are still able to claim a portion of the exclusion.

An example would be a single individual who had to sell their home to move for a job. If they lived in the home for a year, then they would be entitled to half of the exclusion, which is $125,000. Thus, their profit, as long as it was under $125,000, would not be taxed.

Reporting Your Home Sale

For a vast majority of taxpayers, they will not have to report the sale of their house on their tax return. The reason is that a majority of the individuals who sell their home will not exceed the amount of the exclusion. However, to make sure that you do not receive the 1099 for the sale of your home, make sure that the title company has given you the ability to certify that you meet the use, ownership, and timing criteria at closing.

For those who used the first-time homebuyer’s credit in 2008, any outstanding amount of the credit that has not been repaid at the time of the sale will need to be paid with the tax return filed for the year of the home’s sale.

Calculating Your Profit

The profit from the sale of your home needs to be calculated to determine how much actual profit was made to determine if any of it will need to be taxed. The net sales proceeds are the selling price minus selling expenses, such as the real estate agent’s commission. Then you will need to subtract the adjusted basis of your home.

So what is the adjusted basis? Basically, it is the original cost of the home plus the cost of any capital improvements that were made to home, such as a new roof, air conditioning or a swimming pool. If you purchased the home with profit from a home sold before 1997, the basis must be reduced by the amount of profit that was rolled over into the purchase of the new home.

After determining the profit, you will then have to determine if you have any profit that exceeds the tax fee limit. If so, you will need to claim that on your return. However, most home sales will not result in the taxpayer exceeding the exclusion limit, especially as the limit for a married couple filing jointly is $500,000, but is $250,000 for a single individual. Anything not covered by the exclusion must be reported on a Schedule D, which can be completed by your tax professional or accountant.

Finally, it is important to note that the home sale gain exclusion will typically cover the profit made on the sale of most traditional homes. Yet, you will not be able to apply the exclusion to the sale of a vacation home or investment property, as these are not considered primary residences.