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With so much debate over taxes on assets and capital gains, many taxpayers are confused about the tax rules on gains or losses when selling their personal home.
If you sold a home in the 2014 tax year, you may be able to exclude part or all of the profit from your income. This tax rule generally applies if you’ve owned and used the property as your main home for at least two out of five years before the date of sale.
A capital gain or loss is measured against the “basis” of the property; that is, the price that you paid for it when you purchased it originally plus the amounts you paid for any improvements. Note that you cannot add the value of your own labor. You can use an IRS worksheet called Publication 523 to calculate the gain (or loss) on the sale.
You are allowed to exclude from your income up to $250,000 of capital gains from the sale of a personal residence ($500,000 on a joint return). Additionally, to be clear, any gain on the sale of a personal residence is not subject to the new Net Investment Income Tax that was enacted in 2013.
If you can exclude all of the gain, you don’t need to report the sale of the home on your income tax return. But, know that you can exclude a gain from the sale of only one main home per two-year period. If you own more than one home, the “main” home is the one where you reside most of the time. You must pay tax on the gain from selling any other home.
If you can’t exclude all of the gain on your home’s sale, you’ll need to report the home sale on your individual income tax return. In that case, you will probably also receive a Form 1099-S indicating you have earned proceeds from a real estate transaction. You must submit that form with your income tax return.
If you sell your main home for which you received a first-time homebuyer credit, special rules may apply on any gains that may redirect the funds to repay the credit you previously received.
What if you sell your home at a loss? If the money that you receive from selling your home is less than your cost basis, there is no tax benefit. Even though it may be a loss, you cannot deduct the loss from your income.
If you sold a home, or are planning to sell your main home, and want to better understand the tax consequences, contact us at McRuer CPAs for an analysis.
