If you are planning on selling your home, it is important to plan for any resulting tax consequences. Those consequences will depend upon a number of factors.
Is the home your principal residence? If so, you can exclude up to $250,000 (or $500,000 if married filing jointly) from 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:
If, after the exclusion, you still have profit left over, you will report it on Schedule D as a capital gain. If, however, you sell your home for a loss, you may not deduct the loss.
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:
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.
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
Other factors that have offset your investment in the home will reduce the home’s basis. Some examples include
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 Tax & Financial Planning 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.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.