The housing market is sizzling hot right now and has been for the last 18 – 24 months. Home inventories are very low which has created bidding wars and many sellers have received offers well over their asking price. Due to the current housing market, many taxpayers have reached out with questions on how the sale of their personal residence affects their taxes.
The short answer is typically “not at all” as the gain on the sale of your personal residence, in most cases, is not subject to income tax.
This is due to the Section 121 exclusion that allows taxpayers to exclude gain on the sale of their personal residence up to $250,000 if single/head of household or $500,000 for joint filers. However, you must meet both the ownership test and the use test. These tests require you to own the home and use it as your primary residence for at least two of the last five years prior to the date the home is sold. Anyone that moves frequently should be careful. Generally, there isn’t an exclusion for taxpayers that have excluded the gain from the sale of another home within a two-year period of selling your current residence.
Suppose your home has appreciated significantly on sale and the gain exceeds the exclusion amounts (greater than $250K if single or more than $500K on a joint return). In that case, the gain in excess of the exclusion will be taxable and will be subject to tax at the favorable long-term capital gain tax rates. Remember, it is always good to inform your accountant if you have sold your home during the year. Many times a Form 1099-S is generated upon the sale (issued by the Title Company). This is an information income-reporting form that is filed with the IRS. In this case, the taxpayer is required to report the home sale even if the gain from the sale is excludable.
Please reach out to Wegner CPAs with any questions. We can help walk you through the eligibility tests, gain calculations, and determine if any other exceptions apply to your situation.