What are the tax implications when selling your home?
Posted: Jun 04, 2021
The buying and selling of a home is usually the largest financial transaction that you may make in your lifetime. As with most financial transactions, there is a tax angle. You should know what your tax implications are as you go into the deal so that you are able to plan and avoid issues with either the IRS or State Tax Departments.
Unlike with most other transactions that have a capital gain, the government gives you a huge break when you sell your principal home for a profit. You as the Seller, can exclude up to $250,000 ($500,000 if married filing jointly) of the profit from the sale. This exclusion is available for an unlimited number of times, and it applies to houses, apartments, and condominiums.
However, as always there are other rules and limitations that you need to be aware of. To take advantage of the exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Owning it and occupying it are two different things, however, and although you must meet both requirements, you don't have to do this simultaneously. As one legal site explains, "As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times." This is an eligibility break for renters-turned-buyers, who can count rental time before the purchase as part of the "occupy" time.
Also note the word "principal." This must be your main home, where you spend most of your time. You can only have one principal residence at a time. If you have a condo in the city where you work but spend the summer in your beach house, your condo is still your principal residence.
The IRS also imposes conditions to be eligible for the larger $500,000 married exclusion. You must meet all the conditions below:
- You are married and file a joint return for the year.
- Either spouse meets the ownership test.
- Both spouses meet the use test.
- During the two-year period ending on the date of the sale, neither spouse excluded gain from the sale of another home.
If a spouse is deceased, under what conditions can the surviving spouse use the $500,000 exclusion? You must meet all of the following conditions:
- You sell your home within two years of the death of your spouse.
- You have not remarried at the time of the sale.
- Neither you nor your late spouse took the exclusion on another home sold less than two years before the date of the current home sale.
- You meet the two-year ownership and residence requirements (including your late spouse's times of ownership and residence if need be).
Getting a Break on Improvements
As an example - If you are single and buy a house for $300,000, you're limited to a sale later of $550,000 before you start having to pay taxes. However, any improvements you made will increase that $300,000 "basis". The IRS will consider an improvement as a new room, landscaping, a heating system, central ac, new roof, and new siding. General repairs, like a faucet or fixing electrical outlets do not add to the basis. Upgrading the electrical system as part of a larger renovation project would count towards the basis.
When selling a home, work with a good professional Certified Public Accountant or Attorney to make sure your plans are complaint with the tax code. It will save you from any future tax surprises.
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