Reporting the sale of your home on the tax return
If you sell your home, we'll need to report the sale on your tax return. Depending on the gain you made from selling your home, you might not owe any tax. However, if you had a substantial gain or didn't live in the house for a certain time period, you might owe tax. This article will walk you through the information we'll need from you, which we will leverage to identify certain costs that will reduce the gain from the sale of your home.
Determine if you qualify for the Section 121 Exclusion
When you sell your home, you may qualify for a special capital gains exclusion. Section 121 of the IRS revenue code allows single taxpayers to exclude $250,000 and taxpayers who are married filing jointly to exclude $500,000 from the gains on the sale of their home from taxable income.
There are three tests you must meet in order to qualify for this special exclusion:
If you're married and want to use the $500,000 exclusion, you also need to confirm with us the following:
In certain cases, you can treat part of your profit as tax-free even if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests, including change of employment, change of health, or
other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. If you have any of these circumstances, please let us know and we'll consult with you.
Sometimes is might make sense to turn down the government's generosity and not claim the exclusion. Specifically, you might want to pay tax on a home sale if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can't use it more than once every two years.
Provide us with the purchase and sales documents, and capital improvements
Nowadays, most homeowners realized a gain (profit) on the sale of their home. Also, due to the skyrocketing value of homes the past few years, we're starting to see more and more clients who have a tentative taxable gain on the sale of their home even after the $250,000 (single) or $500,000 (married) exclusion is applied. Therefore, we need to get down to the actual gain on the house--not just the reported purchase price and sales price. This is called the adjusted basis. Here's what you need to provide us if you sold your home:
Once we have this information we will do the work to calculate the actual realized gain, and apply the Section 121 exclusion if you qualify.
Determine if you qualify for the Section 121 Exclusion
When you sell your home, you may qualify for a special capital gains exclusion. Section 121 of the IRS revenue code allows single taxpayers to exclude $250,000 and taxpayers who are married filing jointly to exclude $500,000 from the gains on the sale of their home from taxable income.
There are three tests you must meet in order to qualify for this special exclusion:
- Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale.
- Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you're married and want to use the $500,000 exclusion, you also need to confirm with us the following:
- If you are married and file a joint return, at least one spouse must meet the ownership requirement (owned the home for at least two years during the five years prior to the sale date).
- However, both you and your spouse must have lived in the house for two of the five years leading up to the sale.
In certain cases, you can treat part of your profit as tax-free even if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests, including change of employment, change of health, or
other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. If you have any of these circumstances, please let us know and we'll consult with you.
Sometimes is might make sense to turn down the government's generosity and not claim the exclusion. Specifically, you might want to pay tax on a home sale if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can't use it more than once every two years.
Provide us with the purchase and sales documents, and capital improvements
Nowadays, most homeowners realized a gain (profit) on the sale of their home. Also, due to the skyrocketing value of homes the past few years, we're starting to see more and more clients who have a tentative taxable gain on the sale of their home even after the $250,000 (single) or $500,000 (married) exclusion is applied. Therefore, we need to get down to the actual gain on the house--not just the reported purchase price and sales price. This is called the adjusted basis. Here's what you need to provide us if you sold your home:
- The original purchase price of the home. In some cases, we can retrieve this information as part of online public records. If not, we'll ask you to dig up a copy of the Settlement Statement (this was previously referred to as a HUD statement)
- The total cost of all capital improvements you've made to the house. Capital improvements include anything that added value to your home, prolonged it's life or gave it a new or different use. Examples include a new roof, remodeled kitchen or bathroom, a new furnace, central air conditioning, fixtures, hardwood floors, windows, doors, and any appliances that stayed with the home when you sold it. The cost you paid, including labor, materials and sales tax count, too. Once you have these tallied up, send us the total dollar amount of all capital improvements. Note that we don't need receipts. However, ensure that you retain all receipts for your records in case of an IRS examination.
- If you paid to stage the home or put in any expense to spruce it up for sale, we can include these as an expense of the sale, which reduces the gain.
- A copy of the HUD-1 Settlement Statement. Click here to see an example of a HUD statement. We'll examine the HUD statement and report all the expenses you incurred to sell the house. These include the realtors' commission fees, excise taxes and various fees.
Once we have this information we will do the work to calculate the actual realized gain, and apply the Section 121 exclusion if you qualify.
