The Internal Revenue Service is becoming a more people-friendly agency every day. Some of the rules that exemplify this are on the topic of selling your home. The tax rules associated with selling your principal residence are summarized below. These rules apply to sales after May 7, 1997. For more information on sales before this date, visit the IRS website or consult your tax adviser.
Gain
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). Any gain you cannot exclude is taxable.
Loss
You cannot deduct a loss from the sale of your main home. Worksheets, provided by the IRS or your tax adviser, are available to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the amount of the gain that you can exclude.
Reporting the Sale
Do not report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Schedule D, Capital Gains and Losses, of Form 1040.
Remaining Points
If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of sale.
Now, for some details related to the tax rules:
Main Home
Usually, the home you live in most of the time is your main home. This can be a:
- House;
- Houseboat;
- Mobile home;
- Cooperative apartment, or
- Condominium.
To exclude gain under the current rules, generally, you must have owned and lived in the property as your primary residence for at least two years during the five-year period ending on the date of sale.
Land
You may sell the land on which your main home is located but not the house itself. In this case, you cannot exclude any gain you have from the sale of the land.
Example: You sell the land on which your main home is located. You buy another piece of land and move your house to it. This sale is not considered a sale of your main home. Thus you cannot exclude any gain on the sale.
More Than One Home
If you have more than one home, you can only exclude gain from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
Example 1: You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.
Example 2: You own a house but you live in another house that you rent. The rented house is considered your main home.
Property Used Partly as Your Home: If you use only part of the property as your main home, the rules discussed apply only to the gain or loss on the sale of that part of the property.
How to Figure Gain or Loss
To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized and the adjusted basis.
- Selling Price: The selling price is the total amount you receive for your home. It includes money, all notes, mortgages or other debts assumed by the buyer as part of the sale. It also includes the fair market value of any other property or any services you receive.
- Amount Realized: The amount realized is the selling price minus selling expenses. Selling expenses include commissions, advertising fees, legal fees and loan charges paid by the seller, such as loan placement fees or points.
- Adjusted Basis: While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.
- Examples of items that would increase your basis: improvements that have a useful life of more than one year, additions, and amounts you spent after a casualty to restore damaged property.
- Examples that would decrease your basis: gain you postponed from the sale of a previous home before May 7, 1997, deductible casualty losses, insurance payments you have received or expect to receive for casualty losses, payments you received for granting an easement or right-of way and depreciation allowed or allowable if you used your home for business or rental purposes.
Amount of Gain or Loss
After you calculate the amount realized and the home’s adjusted basis, you can figure your gain or loss. If the amount realized is more than the adjusted basis, the difference is a gain and generally taxable, except for any part you can exclude. If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted.
Excluding the Gain
You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means if you qualify, you will not have to pay tax on the gain up to the limit or the maximum amount of exclusion. To qualify for the maximum amount of exclusion, you must meet the ownership and use tests.
Maximum Amount of Exclusion
You can exclude the entire gain on the sale of your main home up to:
- $250,000
- $500,000, if all of the following are true:
- You are married and file a joint return for the year;
- Either you or your spouse meet the ownership test;
- Both you and your spouse meet the use test, or
- During the two-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.
Reduced Maximum Exclusion
The maximum amount of gain you can exclude may be reduced if either of the following is true.
- You did not meet the ownership and use tests for a home you sold because you had:
- A change in health;
- A change in place of employment, or
- Unforeseen circumstances, to the extent provided in regulations.
- Your exclusion would have been disallowed because the rule described in More Than One Home Sold During Two-Year Period, except the home sold because you had:
- A change in health;
- A change in place of employment, or
- Unforeseen circumstances, to the extent provided in regulations.
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, you must have:
- Owned the home for at least two years (the ownership test), and
- Lived in the home as your main home for at least two years (the use test).
Exception
If you owned and lived in the property as your main home for less than two years, you can still claim an exclusion in some cases. The maximum amount you can exclude will be reduced. See Reduced Maximum Exclusion.
Period of Ownership and Use
The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the five-year period ending on the date of sale.
Ownership and Use Tests Met at Different Times
You can meet the ownership and use tests during different two-year periods. However, you must meet both tests during the five-year period ending on the date of the sale.
For example, in 1991 Helen Jones lived in a rented apartment. The apartment building was later changed to a condominium and she bought her unit on December 1, 1997. In 1998, Helen became ill and on April 14th of that year she moved to her daughter’s home. On July 10, 2000, while still living in her daughter’s home, she sold her condominium.
Helen can exclude gain on the sale of her apartment because she met the ownership and use tests. Her five-year period is from July 11, 1995, to July 10, 2000, the date she sold the apartment. She owned her apartment from December 1, 1997 to July 10, 2000 (over two years). She lived in the apartment from July 11, 1995 (the beginning of the five-year period) to April 14, 1998 (over two years).
Bottom Line
There are many special situations that may require more information before excluding the gain on the sale of your home. Henssler Financial’s Tax & Accounting Division can assist you with further information regarding the sale of your home or with your tax consulting and preparation needs. You may contact us at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
