Spring and summer are popular times to buy or sell a house, and with interest rates relatively low — and with Middle Tennessee’s housing market still strong — there’s no shortage of buyers. But before you contact a real estate agent to sell your home, consider all the tax implications.
Sellers can exclude some gain
If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.
To qualify for the exclusion, there are a couple of requirements to meet:
- The ownership test: You must have owned the property for at least two years during the five-year period ending on the sale date.
- The use test: You must have used the property as a principal residence for at least two years during the same five-year period. Periods of ownership and use don’t need to overlap.
The exclusion can’t be used more than once every two years.
Handling bigger gains
What if you’re fortunate enough to have more than $250,000/$500,000 of profit from the sale of your house? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.
Here are a couple more tax considerations when selling a house:
Keep track of your basis: To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
Be aware that you can’t deduct a loss: If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
If you’re selling a second home (for example, a vacation home), keep in mind that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. A KraftCPAs representative can help you plan ahead to minimize taxes and answer any questions you have about your situation.