Selling Your Home – Home Staging Tips
Can Selling Your Home Create a Tax Liability?
Most individuals are aware of the change in the tax code that declares selling your home may not be a taxable event. However, there are certain conditions that must be met to qualify for this exclusion.
Marketing your residence under the arcane requirements of the old tax code did little to help homeowners.
Under the previous tax code, the exclusion of any gain when selling your home, was only available for individuals over the age of 55, and then only once in a lifetime. Gains for other younger individuals could be deferred as long as the gain was used to purchase another home of greater value.
Congress, through the urging of the Homebuilders Associations and others, changed the law in favor of the taxpayer. This meant that selling your home was no longer panic time in regard to income taxes.
Finally, Congress passed a law for marketing your dwelling that actually helped the homeowner.
The following tips may help you to better understand some of the rules when selling your home.
Exclusion of the gain on the sale
If you have lived in your home for at least two of the five years prior to the sale, you may be able to exclude part or all of any gain. There are eligibility tests that you must comply with such as ownership and the use of the home, and it must have been your primary residence.
Limits on the Exclusion of selling your home
In my opinion, and I don’t often agree with Congress, the exclusion limits are very favorable. A single individual can exclude $250,000.00 of gain and joint return filers, can exclude $500,000.00 of gain. Furthermore, this could be done every two years in theory. Also, and very important, the new nuisance tax on net investment income tax does not apply to the gain that is excluded when selling your home.
Possible exceptions to the rules
For disabled individuals, and also certain members of the military service, there are exceptions that may be granted regarding the use of the home, and also the ownership conditions. An IRS Publication 523, Selling Your Home, includes Peace Corp volunteers and also certain government workers.
There are various exceptions for each seller type and too many to list here. The IRS publication covers them quite well. Selling your residence is no longer a matter of great concern.
Selling your home may not need to be reported
If the gain on the sale is not taxable, it usually doesn’t need to be reported. As a matter of fact, when the title company handling the settlement, knows it is your residence, and the gross sales price is less than the exclusion amounts, they won’t send you a Form 1099-S.
When reporting the sale is required
If all or any part of the gain may be taxable, you are required to report it on your tax return. Or if for some reason, you choose not to claim the exclusion, then the sale must be reported. In addition, if you receive a Form 1099-S on the sale, you must also report the sale. Sometimes when selling your home, the gross sales price may be above the exclusion limits. The title company has no way of determining the cost of the property, so they will send you a Form 1099-S to report the sale to the IRS.
How often you can claim the exclusion
There are a few exceptions covered in Publication 523, Selling your Home, but in general terms, you are permitted to claim this exclusion for your primary residence once every two years.
What home qualifies for the exclusion?
There are individuals that own their main home and also a second home held for investment or maybe family vacations. Only the primary home qualifies for the exclusion. However, once the primary home is sold, you can move into your second home and live there for two years, and it now becomes your primary residence, and qualifies for another exclusion.
What about the first time homebuyer credit?
There are special rules that must be followed if you claimed the first time home buyer’s credit on your home purchase. Again, IRS Publication 523, Selling your Home covers this and you need to be aware of it.
Be sure to read this section carefully if you participated in any of the home buyer’s credit programs. This could be a very costly mistake if you don’t report it.
Selling your home at a loss
A loss when selling your primary residence is a personal loss and can’t be deducted on your tax return. Many individuals who sell their personal residence at a loss have a difficult time understanding this. The IRS regulations are very clear on this point.
Other reporting when selling your home
Once you sell your own home and you have a change in address, you need to let the IRS know by sending them a Form 8822, Change of Address. Sometimes, they may need to contact you and IRS correspondence is not forwarded. In addition, if you purchased your medical insurance through the Marketplace, you may need to let them know if you leave the area that is covered in your current Marketplace Plan.
We hope these tips may be of assistance to you, and if you have any questions or comments on selling your home, please contact us or leave a comment below.