Tax Consequences of Selling
Selling a home is a major financial event - and taxes are a key consideration.
Homeowners enjoy some of the most lucrative tax breaks available - one of many factors that makes appreciated housing a major wealth builder.
Consider Taxes Before You Sell
While homeowners typically enjoy favorable tax treatment when selling a home, there are a number of exceptions. Make sure you understand your exact status with regard to taxes before you place your home on the market - it's too late once you get a buyer. Check with your accountant or tax professional if you're unsure where you stand.
The Home Sale Exclusion
Generally, financial gains you realize from the sale of your primary residence are excluded from capital gains taxes up to $250,000 for single filers and $500,000 for married taxpayers filing joint returns. In fact, if you qualify for the full exclusion you don't even have to report the sale on your returns.
Ownership and Use Tests
The primary qualification for the exclusion consists of the ownership and use tests. To pass these tests the following conditions must apply (to you or to your spouse).
- You have owned the property for two out of the last five years.
- You have lived in the property (as your primary residence) for two of the last five years.
- You cannot have used the exclusion on another home sale during the past two years.
If the ownership and use tests are not passed then the entire profit from the sale of the home is generally taxable.
Calculating Your Capital Gain
The capital gain on a home sale is the excess of the net sale proceeds (after deducting marketing, sale, and closing costs) over your cost basis
in the property. The net sale proceeds do not include any portion of the price that is attributable to extra items included in the sale (e.g. furniture).
What if Your Profit is Greater than $500,000?
Gains in excess of the excluded amount ($250,000-$500,000), or all of the gains if the ownership and use tests are failed, are taxable as a normal capital gain. This income is reportable on schedule D of your return. Anyone expecting to realize a gain of this magnitude should probably consult with a tax advisor.
Handling a Loss on the Sale of a Home
A loss on the sale of your home is a capital loss and is not deductible against ordinary income. If you have a substantial loss on a home sale it probably makes sense to discuss the implications with a tax professional.
When to Consult a Pro
Most sellers can handle the tax implications of a home sale without the aid of a professional advisor. There are a number of instances, however, when seeking expert advice is advisable - if you stand to realize a very large gain, are losing money on the sale, or are uncertain about how to proceed.