Selling your home and moving can be expensive, but many of the costs may be deductible. The IRS offers 10 tax tips on deducting some of those selling expenses or profits.
- In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
- If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
- You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
- If you can exclude all of the gain, you do not need to report the sale on your tax return.
- If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
- You cannot deduct a loss from the sale of your main home.
- Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
- If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
- If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.
- When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
When you decide to sell your home, you need to know what the cost basis of the home is, because it needs to be noted on your income tax return for the year you sell your home.
When you are considering selling your home, taxes are probably not the first thing on your mind. Taxes are involved in some way, whether you gain or lose money from a real estate transaction. Enter the term ‘cost basis.’
In the United States, cost basis is a tax law term. The original price you paid for your home is what the basis is considered. Factors such as a home’s appreciation or depreciation is where the cost portion of the calculation is taken into account and also adjusted for.
You, as a taxpayer, will end up paying taxes on a capital gain when you sell your property and your home has appreciated in value. Subtracting the money paid for the property’s original value or basis, this is equal to the amount of money you gained on the sale. You, as a taxpayer, will end up saving on taxes from any loss you may have suffered if, when you sell your property, your home has depreciated in value. With the property’s original basis factored in, this is again equal to the amount of money you lost on the sale.
It does not matter if the property is encumbered by a debt in this equation. The home’s original cost, plus or minus any profit or loss realized at its sale, is all that matters. Any costs associated with the selling of your home can also be subtracted. The calculation has the possibility of being a little confusing, even if the figures seem relatively straightforward, especially if you don’t have the strongest math skills. Contacting a tax specialist is the best way to ensure you understand your tax obligations.
You may qualify for a one time exemption on any gains when you sell your home, so again, consult with a CPA or tax professional for details on how your particular tax situation needs to be handled when you sell your home.
Owning your own home is part of the American dream. But according to a recent Wall Street Journal article, owning a home is not always the best idea.
Some Americans who cashed in on the $8,000 first-time home buyers credit before it expired in April 2010 got a bad deal. The credit pushed up sales prices, which then dropped dramatically when the buying frenzy ended.
So is it better to rent a home than buy? That’s not always the case, either. Let’s look at the tax benefits for a residential homeowner.
Consider a Midwestern family of four who bought a three-bedroom house they could afford. Suppose they got a thirty-year, $200,000 loan with 4.5 percent interest, for a monthly payment of $1,015. Add in an estimated average property tax of $1,625 and insurance of $1,200 per year, and the total annual lodging expense would be around $15,000—or $1,250 per month.
In this scenario, $13,500 worth of mortgage interest and property taxes would be deductible. Folks in a combined federal and state tax bracket of 30 percent would save $337.50 per month. After taxes, that home would cost them $912.50 per month.
How much would a similar home cost to rent? Looking at the area around Chicago, Ill., we can find two- to three-bedroom homes available for around $1,500 per month. Taking into consideration the tax benefits for homeowners, renting a home would have cost the family $7,000 more per year than owning one.
Even after a drop in value within the first year, the family came out just about even between renting and buying. Families who buy homes they can afford tend to stay in those homes for a decade or more. In the long run, the prices rise, and the loan balance declines. When they get ready to sell in ten to thirty years, they walk away with a profit.
People who select homes where the monthly mortgage, property tax, and insurance payments are no more than 15–30 percent more than their rent will always fare well in the long run.
So—Rent or Buy?
The answer is different for every family, in every market. With interest rates the lowest they’ve been in generations, it’s certainly worth looking for a home to buy. The time may never be better than it is right now.
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