When selling your home, you might qualify for the opportunity to exclude part of, if not all, the gains you make from the sale from your income. However, for this possibility to apply to you, it is vital that you meet certain ownership and use tests.
In other words, you must have owned and lived in the home for at least two years prior to selling it. Additionally, it must have served as your main home for that time.
What happens if you sell your main home for a capital gain?
If you sell your main home for a capital gain, you could potentially exclude up to $250,000 of that gain from your income. This value changes if you file a joint return with your spouse. In that case, you might be able to exclude closer to $500,000 of the gain from the income you will be taxed on by the IRS.
Homeowners who choose to exclude all the gain they received from the sale of their home do not automatically need to report the sale of their home on their tax return. However, if the real estate agency, closing company or mortgage lender issued Form 1099-S, Proceeds from Real Estate Transactions, to the sellers of the home, then this is no longer true.
What if you experience a loss when selling your main home?
Not all sales of homes result in a capital gain. Sometimes, homeowners who sell their homes experience a loss instead. This can occur when the main home sells for less than what the homebuyers originally paid for it. In that case, the loss is not deductible.
What if you own more than one home?
If you are the owner of more than one home, you can only exclude the gain that you received from the sale of your main home. For the other home or homes that you sold, you must pay taxes on the gains from those sales.
If you don’t qualify for the opportunity to exclude all taxable gain from your income, then you need to report the gain from the sale of your home when filing your tax return. If you receive Form 1099-S, you are required to report the sale of the home on your tax return even if you do not have any taxable gains to report.
Other tax considerations to think about
Generally speaking, you have to report forgiven or canceled debt on your tax return. It must be reported as income even if you have a mortgage workout, experienced a foreclosure or had other mortgage debt canceled in your name. That said, there are exceptions to this rule.
For instance, the rules are different if you have a disability. This is also true if you are a member of the military, part of the intelligence community or a Peace Corps worker. For example, if military personnel live in their home for two out of the 15 years that they own it, they will qualify for the exclusion of capital gains when filing taxes.
For more information on tax considerations to make when selling your home, refer to the following IRS resources:
- Publication 523, Selling Your Home.
- Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (for Individuals).
- “How Do I Report the Debt Forgiven My Residence Due to Foreclosure, Repossession, Abandonment, or Because of a Loan Modification or Short Sale?”
As a general rule of thumb, you’ll need to obtain and fill out Form 1099-C, Cancellation of Debt. You should be able to get this form directly from your mortgage lender. If you need to address the cancellation of your debt online, you can do so via the official IRS website.
Additionally, you can refer to Topic No. 703, Basis of Assets. This document explains the concept of a basis, which is typically the amount of your capital investment in property for tax purposes. You can use your basis to determine the value of depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale of your home.
In most situations, the basis of an asset is its cost to you. In other words, it is the amount of money you paid in cash for the asset, debt obligations and the cost of other properties or services.
As always, consult with a tax professional to fully understand the tax-related considerations you should make when selling your home. That way, you can lower your risk of taking a tax hit that you could have avoided.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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