Tax Implications of Selling Your Home
The best seasons for selling a home are spring and summer. With spring in the air and summer right around the corner, buyers may be out in full force in your area. An added bonus for buyers is the current interest rates. The average 30-year fixed mortgage rate was 4.3% during the week of May 2, 2019, while the 15-year mortgage rate was 3.68%. This is down 0.41 and 0.43%, respectively, from last year.
Before you decide to sell your home, you should take into account the tax considerations.
Excluding some gain
When selling your principal residence, if you meet some requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Qualifying exclusion gain is also omitted from the 3.8% net investment income tax.
For the exclusion to qualify, you must meet these requirements:
- You must have owned the property for at least two years during the five-year period ending on the sale date
- The property must’ve been used by you as a principal residence for at least two years during that same five-year period. Periods of ownership and use don’t need to overlap.
You should also be aware that you can’t use the exclusion more than once every two years.
If you get more than $250,000/$500,000 of profit when selling your home, you no longer qualify for the exclusion. Generally, any gain that doesn’t qualify will be taxed at your long-term capital gains rate if you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.
Keep in mind these additional tax considerations before, or in the process of, selling your home:
- Tracking your basis. In order to have an accurate tax basis, be sure to keep meticulous records that include information on the original cost and subsequent improvements of the house. The financial records of the home can be reduced by any casualty losses and depreciation claimed based on business use.
- You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. However, you may be able to get a deductible if part of your home is rented out or used exclusively for your business. The deductible would only be attributed to that portion of the house.
Second homes (such as a vacation home) aren’t eligible for the gain exclusion. If the home qualifies as a rental property, it can be considered a business asset. In this case, you may be able to defer tax on gains through an installment sale or a Section 1031 exchange, or you may be able to deduct a loss.
A home is probably the largest investment you can make. Before selling, be sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have.