Millions of people make the big decision to sell their home each year. According to realtor.org, 5,250,000 existing homes were sold in 2015. Like other major life decisions, the sale of your house has potential tax implications.
Selling your house will result in a gain or a loss. The gain or loss is the difference between the sales price and your “basis” in the house. The basis is calculated as the amount you originally paid for it, plus any improvements made to the house. Selling expenses, fees, and closing costs are also included in this calculation. There are a few other things that can affect the basis, such as depreciation you have taken on the house (for example, converted rental house or home office), insurance payments received, and real estate taxes paid at closing.
Any gain on the sale of your house is subject to capital gains tax. However, you may be able to exclude a portion or all of the gain. Joint taxpayers can exclude $500,000 of the gain, while single taxpayers can exclude $250,000. These exclusions are limited to those who meet certain requirements:
- You must have owned the house for at least two of the past five years.
- You must have lived in the house for at least two of the past five years.
- The house must have been your primary residence in the two years you lived there.
- You cannot take the exclusion if you have taken it on another home in the previous two years.
If you have a loss, you cannot deduct the loss on your tax return. However, you may still need to report the sale on your tax return if you receive a 1099-S for the proceeds. If you have a loss and you did not receive a 1099-S, there is no need to report the sale on your return.
The calculation of the gain or loss can get complicated, so please contact us if you have any questions regarding this. Also, there are of course exceptions to the exclusion rules. We can help determine if you qualify as an exception as well.