Taxpayers who sell their home may qualify to exclude all or part of any gain from the sale when filing their tax return. Here are some things that homeowners should think about when selling a home:
- Capital Gains Tax:
- The profit from selling your home is taxable income subject to capital gains tax. However, depending on your circumstances, you might qualify for exclusions that reduce or eliminate the capital gain and resulting tax.
- Home Sale Gain Exclusion:
- This exclusion applies only to your primary residence.
- Generally, if you have owned and used the home as your primary residence for at least two of the five years leading up to the date of sale, you can exclude up to $250,000 of capital gain from your income (up to $500,000 if married filing joint).
- For a married couple filing jointly, only one spouse has to meet the ownership requirement.
- If your home was transferred to you by a spouse of ex-spouse (whether in connection with a divorce or not), you can count any time when your spouse owned the home as time when you owned it.
- Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
- If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if: 1) you are a sole or joint owner AND 2) your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his/her main home.
- If you were temporarily absent from the property due to work, health, or other reasons, you might still qualify for the exclusion.
- If you do not meet the 2 of 5-year criteria because of an involuntary circumstance (like relocating for work, moving into a facility for medical reasons, divorce, or legal separation), you may qualify for a prorated exclusion.
- If you’re selling a second home or rental property, different rules may apply.
- Reporting the Sale:
- Keep records of the home’s purchase price, costs of improvements, and other relevant documents.
- Calculate your capital gain by subtracting the home’s basis and any selling/closing costs from the sale price. The basis includes the original purchase price and any qualified improvements.
- Report the sale of your home on your tax return using Form 8949 and Schedule D.
- Provide accurate details about the sale price, any improvements made, and other relevant information.
- If you receive a Form 1099-S from the real estate transaction, ensure its accuracy and report the sale on your return.
- Mortgage Debt Forgiveness:
- Understand that cancelled mortgage debt might be taxable income, but certain exclusions might apply.
Remember, tax laws can be complex and subject to change. It’s recommended to consult a tax professional or refer directly to IRS resources for accurate and up-to-date information tailored to your specific situation.