If you own a home and are thinking about selling, you know that spring and summer are the optimum seasons for selling. The combination of low inventory and attractive interest rates means it’s a seller’s market, so this may be your season to sell!
Before you contact a realtor to sell your home, you should review these important tax considerations.
Gain May be Excluded from Tax
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. It’s important not to confuse gain with the selling price. Gain is calculated by taking your selling price (less certain closing costs & commissions) and subtracting your basis (the basis is the amount you paid for your home plus any improvements). The gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax, which can be an added benefit if you’re a high-income earner.
To qualify for the gain exclusion, you must meet two tests:
- 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.)
One other caveat: you cannot use the gain exclusion more than once every two years.
Gain in Excess of Exclusion is Capital Gain
If you’re fortunate enough to have more than $250,000/$500,000 of gain when selling your home, there will be some tax due. Any gain that that exceeds the $250,000/$500,000 exclusion generally will be taxed at your long-term capital gains tax rate, provided you owned the home for at least a year. If you didn’t own it for at least a year, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double than the long-term gain rate.
Additional tax considerations when selling a home:
- 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. You may be able to pull some of this information from old loan documents if you ever borrowed money to fund a remodel.
- Unfortunately, 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), be aware 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. If it’s truly a trade or business property (i.e., rental), you may be able to deduct a loss.
Like most people, your home is probably your largest investment. So before selling it, make sure you understand the tax implications. Everyone’s situation is different. If you’re concerned you may have a taxable gain please reach out to your Wegner tax professional! We can help you plan ahead to minimize your tax burden and answer any questions you have about your unique situation.