Be aware of the tax consequences before selling your home

Summer is the peak season for selling a home in many parts of the country. If you are planning on putting your home on the market soon, you are probably thinking about things like how fast it will sell and how much you’ll get for it. However, don’t forget to consider the tax consequences.

Home sale gain exclusion

The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act (TCJA) involved a provision constricting the rules for the home sale gain exclusion. Luckily, that provision was excluded from the final version that was signed into law.

As a result, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain if you’re selling your principal residence. Benefit that is eligible for exclusion is also excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet specific tests. For example, you must own and use the home as your primary residence for at least two years during the five-year period before the sale. (Typically, you can’t exclude gain assigned to a period of “nonqualified” use.) Also, you can’t use the exclusion more than once every two years.

More tax considerations

Any gain that doesn’t qualify for the exclusion, as long as you owned the home for at least a year, will be taxed at your long-term capital gains rate. If you have owned the home for less than a year, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are some more tax-related things to consider when selling a home:

Tax basis. Make sure to keep detailed records to support a correct tax basis, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claim based on business use.

Losses. You usually cannot deduct a loss on the sale of your primary residence. However, the loss attributed to the part of your home that is rented out or used exclusively for your business may be deductible.

Second homes. Be aware that it won’t be eligible for the gain exclusion if you’re selling a second home. Though it can be considered a business asset, if it qualifies as a rental property, and you can maybe defer tax on any gains through an installment sale or a Section 1031 exchange, or you might be able to deduct a loss.

A big investment

One of your most significant investments is likely your home, so it’s important to think about the tax consequences before selling it. If you are preparing to put your home on the market, we can help you evaluate the potential tax impact. Contact us to learn more.

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Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.