Chart Your Course Before You Set Sail
by Bob Williams
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In many parts of the country, the real estate markets are beginning to stir. People are putting their homes up for sale – and other people are actually buying them. And that’s something we haven’t seen in a while.
For too long, the residential real estate market was like a rusty old ship, sitting at the dock, low in the water. It wasn’t sinking, but it needed some help before it could sail again.
So if you’re considering selling your home, you’ll benefit from thinking about the tax consequences now – before the “Sold” sign goes up. Depending on your circumstances, you may not have to pay any extra tax on profit you make on the sale of your home. But let’s look at some key points the IRS will be looking at too.
Taxable – Or Not?
First, think back five years from the date of sale (or the projected date of sale). In general, you’re eligible to exclude the gain from your income if you have owned and used your home as your main home for at least two of those five years.
If you file Married Filing Jointly, you could exclude up to $500,000 of the gain from your income taxes. If you file Single or Head of Household, the exclusion drops to $250,000. If you’re not sure you qualify, check with a qualified tax preparer.
The IRS doesn’t allow you to double-dip, however. If you excluded the gain from the sale of another home in the two years prior, don’t expect to do the same this time around. You might qualify for a partial exclusion, but not for the full amount.
Taxpayers with more than one home can exclude the gain only from the sale of their main home. If a second or vacation home is sold, any gains are taxable. What if you live in both of them? The IRS says your main home is the one you live in most of the time.
No Gain, No Pain
If you can exclude all the gain, you don’t need to report the sale of the home on your tax return. On the other hand, if your gain cannot be excluded, it is indeed taxable. Report it on Form 1040, Schedule D - Capital Gains & Losses.
If you took a loss on the sale of your main home, you don’t need to report that, either. The IRS says you can’t deduct such a loss from your return.
Many taxpayers bought their homes using the First-Time Homebuyer Credit. If that’s the case, some special rules apply. Check out IRS Publication 523, Selling Your Home, for details.
Publication 523 has helpful worksheets to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
So maybe this will be the year you take the plunge and put the homestead on the market. Whether you’re looking for a newer home, a bigger place, or just to get out of a mortgage altogether, this could be the time to plan your move.
And that rusty ship of a real estate market? Well, it’s been patched up and painted, and the engine is coming to life. There’s still work in progress, but she’s cast off from the dock and heading for warmer waters.
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