Home sales are major life changes. You will have to learn how to properly report any profits associated with the sale of your house before you can focus on buying a new one. This may affect your financial planning since you may receive a windfall of cash and pay extra house sale tax. Things to know include tax breaks, capital gains on home sale, reduced home sale exclusion, how to report your house sale on a tax return, and how to determine the total profit of your home sale. It may be helpful to talk to an enrolled agent before you sell your house. At the same time, we’ve gathered some tips to help you before selling your home.
There’s a chance some of the profit you make when you sell your home isn’t taxable. If you meet specific requirements, you can exclude up to $250,000 of your profits (up to $500,000 if you file jointly with your spouse). These are the qualifications:
If you’ve asked yourself, can I exclude the gain from my income? The answer is yes. Even if you do not qualify to exclude the whole amount of your profit, you may still be able to exclude a portion. If you only lived in the home for a year before you sold it, then you do not meet the two-out-of-five-year residency requirement. However, in some cases, a reduced exclusion is available if you had to sell because of a change of employment, health problems, or other unforeseen circumstances, like a divorce or giving birth to multiple babies from one pregnancy. The IRS still allows you to exclude some profits from home sales if you need to move because your family is growing – it’s just a little less than the total exclusion amount for home sales.
You’ve undoubtedly asked yourself this question: Do I have to report the sale of my home to the IRS? Well, not always. You can sign a statement or affidavit confirming that your gain from the sale of your home is not taxable. The closing agent won’t typically send Form 1099-S, Proceeds from Real Estate Transactions, to you or the IRS once you sign that form. In that case, you are not required to report the sale on your tax return. You must, however, report the sale of your home on your tax return if you received Form 1099-S. This is true even if the gain you could get from the sale is not taxable.
In the event that the house is sold at a loss, it is considered a personal loss. You can’t deduct that loss from your taxes.
You can only report a long-term capital gain if you have owned the property for more than one year.
In 2022, the capital gains tax rates are either 0%, 15%, or 20% if you had your home for more than one year. Your income tax bracket determines the rate for capital gains tax on real estate. The breakdown is as follows:
|Tax-filing status||Single||Married, filing jointly||Married, filing separately||Head of household|
|0%||$0 to $41,675||$0 to $83,350||$0 to $41,675||$0 to $55,800|
|15%||$41,676 to $459,750||$83,351 to $517,200||$41,676 to $258,600||$55,801 to $488,500|
|20%||$459,751 or more||$517,201 or more||$258,601 or more||$488,501 or more|
If you bought a home in 2008 and used the First-Time Homebuyer Credit, you may be required to repay a portion or all of the credit when you sell. This is also true if you bought the home in 2009 or 2010 and sold it within 36 months of purchase. The smaller of these two amounts must be repaid:
You may be eligible for an exception to paying back the credit, depending on a couple of factors. For example, you aren’t required to pay the credit back if you don’t have a gain on the home’s sale.
Only the gain on the sale of your primary residence can be excluded. That is, the home you live in most of the time. This is generally the address where you receive mail and the address listed with your identification or billing company.
In the event that your house value increased when you didn’t live there, at least a part of that gain is taxable. You’re not qualified for tax exemption and cannot exclude any gain on the property that has been used as a rental house. If you used it as a rental, any gain from renting the house is taxable. To calculate the amount of gain you cannot exclude, assume the property’s value has gone up evenly during the period you owned it.
Assuming that you will be selling another primary residence within two years, you might consider claiming the capital gain on the sale of your current house instead of excluding it. You can claim a tax exclusion only once every two years on the sale of your primary residence.
In some cases it may be more beneficial to claim the current gain as income. You can then use the exclusion when selling your main residence in the future.
The IRS requires that you update your address every time you sell your home by submitting Form 8822, Change of Address. You should do that, especially if you expect correspondence from the IRS, such as a tax refund.
We tried to cover all the tax aspects of home ownership in this article. But there is definitely more to it. If you live in the Bronx, Eastchester, Mount Vernon, Westchester or Yonkers and want to know more about taxes on selling a house, call us for a free 15-minute tax consultation!