Tax Implications of Selling your Home

Thinking of selling your home? Be sure you review the conditions needed to get the gain excluded from being taxed.

In the last couple months, I’ve had a couple of clients bring up the tax guidance given by their real estate agents regarding the taxability of selling a personal residence, often without understanding all of the requirements needed in order to get tax exempt treatment. Generally, taxpayers have a gain or loss when disposing of property depending on the sales price of the property and the taxpayer’s adjusted basis of the property. The difference between the sales price and the adjusted basis will be the gain or loss realized on the disposition of the property. So, are you taxed when you sell your residence?

Selling your personal residence has special rules used to determine if the transaction will be taxable to you. You may be able to exclude from income all or a portion of the gain on your home sale. If you can exclude all of the gain, then generally you won’t have to report the gain on your tax return. You will have a capital gain on the sale of your home if the sales price less selling expenses is greater than your adjusted basis in the house. Your basis is usually the original cost of the house, certain closing costs at purchase, and any capital improvements you have made less any casualty loss amount and other decreases like depreciation taken for business use of your home or if the house was a rental at any time.

The basic rule is that if you have a capital gain from the sale of your main home, then you may exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. There are rules on what is considered your primary or main home based on usage of the house. There are special rules also to be considered if the house was a rental at any point of ownership. You should consult your tax advisor if you are considering selling your home to see if there are special tax considerations to be taken into consideration.

What is your basis if you received your home through an inheritance or gift? Here is what you have to consider to answer that question.

·         The adjusted cost basis to the donor just before he or she made the gift to you

·         The fair market value (FMV) at the time you were gifted

·         The amount of gift tax that may have been paid at the time of the gift

There are some tax planning opportunities if you are considering in buying a new home and converting your current home into a rental property. After a certain time period you will lose the ability to exclude the gain since your former home is considered a rental property not eligible for the exclusion.

It is always good to get tax advice before taking any action. Please feel free to set up an appointment and let Worden Tax Firm walk you through your options when you are looking at buying or selling your home.