If you are considering selling your home or have recently sold your home, there are possible tax consequences. The good news? Much of the gain on the sale of your home may be tax exempt. The bad news? If you sold your home at a loss, in all likelihood, there is not a deduction available to you. Here is what you need to know.
Excluded gains. You can generally exclude $250,000 of any gain on the sale of your main home ($500,000 if married filing jointly). To qualify the property must be your main home and you must have lived in it for two of the past five years prior to the sale of your property.
More than one home. If you own more than one home, your main home is the one you live in most of the time.
Limits. You may not take the gain exclusion if you used the exclusion on another home in the two years prior to the sale of your current property.
Tips to Ensure the Gain Exclusion Works for You
Know the timing. If you have used the gain exclusion in the past, be very careful about the timing of the sale of your current home. Making a mistake here could cost you a lot in additional tax.
Two homes? Plan your residency. If you have two properties, plan your living arrangements to ensure the property you sell can qualify you for the gain exclusion. You will also need evidence that your property is your main home. Keep mail, drivers license, tax returns, bank account statements, and other records that show your address as support for your residency claim.
Marriage and divorce. If you have a substantial gain and you are planning on getting married or divorced you may need to plan for the sale of your primary residence to maximize the use of the $500,000 (joint) versus the $250,000 (single) gain exclusion. Call for a planning session if this might impact your situation.
Homebuyer Credit complication. If you used the First-time Homebuyer Credit to purchase your home, you will need to plan for possible repayment of the credit. This is the case if you sell your home within 36 months of receiving the tax benefit or if you are participating in the IRS credit repayment program.
Keep track of improvements. The longer you live in a home, the more likelihood of a gain on the property when you sell it. Remember that the cost basis of your home can be increased (reducing possible gains) by the cost of improvements made over time. So develop a system to keep track of the money spent to improve your residence.
No Help for Losses?
While losses on the sale of a personal residence are not generally tax deductible, there are some things you need to know.
Insolvency. If the bank repossesses a property and debt forgiveness is involved, you will need to be aware of the tax consequences. Debt forgiveness is generally deemed income to you, unless you qualify for special foreclosure relief programs.
Disaster. If your loss is due to a disaster in a presidentially declared disaster area, there are other special tax provisions that apply.