If you are planning on selling your home, it is important to plan for any resulting tax consequences. What those consequences will be depends upon a number of factors.
Exclusion for Gain on the Sale of a Principal Residence
Is the home your principal residence? If so, you can exclude up to $250,000 (or $500,000 if married filing jointly) of the sale’s profit. This allows most taxpayers to sell their principal residences without significant additional tax obligation. In order to qualify for this exclusion, you must meet the following criteria:
- You must have owned and occupied the home as a “principal residence” for an aggregate period of at least two of the five years immediately preceding sale.
- You must not have excluded gain on the sale of another home in the previous two years.
- The IRS may grant exceptions to these requirements if the primary reason for the sale involves
- Heath, including the health of family members for whom you provide care
- Employment change, or
- Other unforeseen circumstances, such as death, divorce, or damage resulting from disaster.
If, after the exclusion, you still have profit left over, you will report it on Schedule D as capital gain. If, however, you sell your home for a loss, you may not deduct the loss.
Rules for Taxpayers with More Than One Home
If you own more than one home that you use as a residence, you can only claim one as your principal residence under the exclusion rule. The IRS has established the following criteria to determine which property qualifies as the principal residence:
- The amount time you spend there
- Your place of employment
- The location of your family members’ main home
- The address listed on your tax returns, driver’s license, auto registration, and voter registration
- The location of your banks
- The location of recreational or religious organizations to which you belong
If you are thinking of selling one of your homes, it is important to keep these criteria in mind when planning the sale. Consult with your CPA in advance of the sale to determine the best way to structure your activities to limit or eliminate your resulting tax obligation.
Calculating Profit: What Is Your Basis?
When determining profit on the sale of a home, the IRS stipulates that you subtract the adjusted tax basis of the home from the net proceeds from the sale. The adjusted tax basis is a way of calculating your actual investment in the home. This includes
- The original price paid for the home, or
- In the case of a home you built yourself, construction costs including labor, but excluding your own personal labor
- In the case of an inherited home, its fair market value at the time of the benefactor’s death
- In the case of a gifted home, its adjusted basis in the hands of the giver at the time of the gift
- Improvements or additions to the home with a useful life of over one year, excluding any improvements that are no longer part of the home
- Special assessments for local improvements
- Restoration after damage
Other factors that have offset your investment in the home will reduce the home’s basis. Some examples include
- Gain postponed from a sale prior to 1997
- Deductible casualty losses
- Insurance payments received to cover losses
- Tax credits received for energy-related improvements
After determining your home’s adjusted basis, the difference between basis and net sale proceeds is your profit for tax purposes.
If you anticipate the sale of your home, speak with your CPA about how to plan ahead to limit your tax liability. Boelman Shaw Capital Partners offers our clients comprehensive tax and investment planning, as well as tax preparation and IRS representation. Contact our Des Moines office to schedule an appointment.
Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.