Usually, profits are taxable. However, when selling a home, taxpayers may not have to pay taxes on the gain from the sale. Here are some points to keep in mind if selling a home this year.
- Exclusion of gain Taxpayers may be able to exclude part or all of the gain from the sale of a home if they meet the eligibility test. Parts of the test involve ownership and use of the home. Taxpayers must have owned and used the home as their main residence for at least two out of the five years before the date of sale.
- Exceptions may apply There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability that are unable to care for themselves. Another applies to certain members of the military which includes certain government and Peace Corps workers.
- Exclusion limit The most gain a taxpayer can exclude from tax is $250,000. This limit is $500,000 for joint returns. The 3.8% Net Investment Income Tax on certain investment income will not apply to the gain on sale excluded from income.
- Reporting the sale If the gain is not taxable, the taxpayer may not need to report the sale to the IRS on the tax return. However, taxpayers must report the sale on their tax return if they can’t exclude all or part of the gain, or if they choose not to claim the exclusion. Also, taxpayers who receive Form 1099-S, Proceeds From Real Estate Transactions, must report the gain.
- Exclusion frequency limit Generally, taxpayers may exclude the gain from the sale of their primary residence only once every two years. Some exceptions may apply to this rule.
- Only a main residence qualifies Taxpayers who own more than one home may only exclude the gain on the sale of their main residence, which is considered to be the home lived in most of the time.
- First-time Homebuyer Credit For taxpayers who claimed the first-time homebuyer credit when purchasing the home, special rules apply to the sale and the credit may need to be repaid.
- Home sold at a Loss Taxpayers who sell their main home at a loss can’t deduct the loss on their tax return.