Let’s start with the good news: the money you make from selling your home is usually tax-free. Now you’re wondering, what are the exceptions? It depends on several factors, relating to time and money, outlined below. Know the following rules and your tax bill won’t skyrocket if you happen to be one of the exceptions.
The tax break is dependent on how long you lived in the home before you sold it, and how much money you made from the sale. If you owned and lived in the home for two to five years of the five years before the sale, up to $250,000 of the profit is tax free. The residency and ownership does not have to be continuous or the immediate years prior to the sale. If you are married and file jointly, the bar raises to $500,000. Under these circumstances, both you and your spouse must have lived in the house following the same timing guidelines above. Essentially, you are excluding this profit from your taxable income. You can use this exclusion every time you sell a primary residence (following the same guidelines) as long as you haven’t done so in the past two years. If your profit exceeds the limitations, this qualifies as a capital gain on Schedule D. When calculating the gain on your home, you must figure out your adjusted basis, adding capital improvements and subtracting depreciation. There are several factors to consider when adding or subtracting from the original cost of our home, that is best handled with a tax professional.
There are special circumstances that allow you to qualify for the tax break. If the home was apart of a divorce settlement, the time that the home was owned by your former spouse counts towards the two-out-of-five-years requirement. Further, if one spouse leaves the home because of a divorce or separation agreement, the spouse that does not live in the home can count their absence towards the ownership period. If either spouse dies and the surviving spouse does not remarry prior to the date of the sale, the surviving spouse can count the time that the deceased spouse lived in the house towards the two year requirement.
Short and temporary absences can count towards ownership of the home, even if rented to others.
Finally, if you are on active duty, work for the foreign service or intelligence agencies, your absence can be counted towards the timing requirement, given that your duty station is at least 50 miles from home and you are absent on government orders and residing in government housing.
There are also cases of reduced exclusion, by which part of your profit is tax-free even if you don’t meet the two year requirement. This is available to those who need to move because of a change of employment, health, or other unforeseen circumstances.
Primarily, you need to report the gain on your tax return, or if you received a Form 1099-S by the real estate closing agent. Since 1997, you cannot postpone gains under “rollover rules,” by which you put off paying taxes because you used the gains to buy a new home.
Communicate to the real estate closing agent that you do not need a Form 1099-S because you meet the tax-free requirements. This is especially important because they would also send a copy to the IRS. As long as you take care of this, you do not need to report the sale on your tax return.
Selling a home can greatly affect your tax return and requires several considerations and calculations; in most cases, taxpayers do not have to pay taxes. Regardless of what your circumstances may be, it is always best to consult a tax professional, as the amount of gain or loss can equate to the difference between reporting and not reporting income.
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