Tax Consequences of Selling Your House
What you should know before you sell your residence

Selling your home can be both interesting and challenging especially if you are endeavoring to put one house on sale and invest in another at the same time. While you are probably crunching up the numbers and thinking about the costs involved in selling and moving, you also need to think about the implications of tax when selling your home. It is essential that homeowners have a basic comprehension of the federal tax consequences as this will assist them in making important decisions of financial value when selling their homes.

Regrettably, there are many wrong impressions concerning the tax regulations that affect the sale of a home. This occurs because of the many considerable changes that have taken place with regards to these regulations. Most people for example erroneously believe that they have to be 55 to qualify to exclude gain from the sale of their homes for tax purposes. However, the exclusion is not a tax benefit that is given to you only once. It is a tax break that you can take advantage of every two years. It is also wrong to believe in the notion that you must reinvest what you get from the sale of a home to qualify for this tax benefit.

Knowing what the present rules are and how they work is important. It is also essential to understand how to calculate the gain or loss that is an outcome of the sale of your home. It is also essential to determine how the gain or loss is treated with regards to federal tax determinations. There is the $500,000 exclusion only for married couples and the $250,000 exclusion for the singles. It is also essential for homeowners to realize that this break only applies to their primary residence. So if you have vacation homes, this tax break will not apply to them. The term “primary residence” refers to “the place where you generally spend most of your time during the year”.

Home Sellers and Tax Factors

Under specified factors, federal tax laws permit home sellers the exclusion of capital gains. If you want to sell a home that has been your primary residence for about two of the past five years, you can qualify for exemptions. If you are single, you can qualify for up to $250,000 exclusions on your profits while married couples can file a joint exclusion of up to $500,000. You are qualified for this exclusion throughout your lifetime if you have not exercised this option on another of your residences in the past two years.

There are specific conditions that have been specified by the Internal Revenue Service for taking the exclusion on your profit. This is despite the fact that you might not qualify for the two-year requirement. If you are suffering from a sickness, find yourself out of a job, or find yourself in unexpected situations, you might qualify for a partial exclusion. This is in the possible if you disposed of your house prior to two years of staying in it. By seeking advice from a tax expert, you will be able to take an informed decision on the matter.

The Importance of Calculating Your Tax Bill

As long as you qualify for the exclusion, and are sure that you are not under any obligation to pay taxes because of the sale of your home, it is not necessary that you declare the sale of your home when filing tax returns. If you are not obligated to pay taxes, with the help of the tax expert, you should compute the altered basis of the house. Generally, this is the initial cost of your home along with capital improvements.

If you have made certain improvements or additions such as a deck, roofing, heating system, or basement finishing, and if you have probably remodeled your kitchen, these essentially, are capital improvements. Any form of general or regular maintenance cannot be referred to as a capital improvement. It is essential to ensure that you keep good records when you make improvements on your home because you might need to present the documentation to the IRS.

You might receive tax credits for a home office, get a first-time buyer tax incentive, or get a tax incentive because of energy efficient enhancements. These will also form the basis of your calculations with reference to depreciation. Tax calculations are also based on what you were offered for the home, minus settlement charges, minus the adjusted basis of your home. Deductible costs include the broker’s commission, legal, and inspection, as well as administrative costs and indemnity insurance.

Any enhancements that were done with the purpose of selling your home can also be deducted if the improvements were carried out inside 90 days prior to the sale. If you are moving because you had to have a change of jobs, you can make deductions on your tax bill if you about 50 miles from your place of residence.

Health Issues and Tax Deductions

You might be forced to put your house in the market because of medical or health factors. You have to get a letter from your doctor and you must present this documentation to the Internal Revenue Service. While such documentation does not necessarily have to be presented with your tax returns, it is essential that you have it with you should the IRS require more information.

Unforeseen Circumstances and Your Tax

There will be situations where you have to sell your home because of circumstances that are unforeseen and unavoidable. While the 1997 law did not define what these circumstances are, the present law is quite detailed about the circumstances. You will be expected to document such argumentation. In the IRS publication 523, there is a section that details such circumstances. In general, they are described as a situation which takes place and there is no way you could have rationally foreseen the event before you purchased and took up residence of your primary home.

These unavoidable and never anticipated occurrences are specified by the Internal Revenue Service. They include situations where a natural disaster occurs, when there is a war, when an act of terrorism takes place, when you have to change jobs or become unemployed and you are not able to finance your costs of living, when death occurs in your family, when there is a divorce or separation situation, and when you happen to have multiple births in one pregnancy.

Partial Exclusions of Tax

You can also make partial exclusions of your profit if you are disposing your home and you have stayed in it for not more than two years and you qualify for one of the exceptions. The partial exclusion is computed based on how much time you have actually lived in your home. You first determine the number of months you have resided in your home and then this number is made divisible by 24. This number is then multiplied by $250,000 for those who are not married and by $500,000 for those who are married.

Let’s take an example of a man who is not married and lived in their home for 12 months. They are forced to sell their home and relocate because they have been transferred to another location. How do they then calculate their partial exclusion? This is 12 months divisible which is divisible by 24 months and multiplied by the maximum exclusion of $250,000. This gives you an exclusion of up to $125,000 in profit. Should your profit be less than $125,000, then this profit should be excluded from your taxable income. This same approach will apply for a married couple except that they will do the calculation with a figure of $500,000 and not $250,000.

Declaring Profits in Your Home Sale

It is essential for home owners to know that they cannot make deductions when they sell their main house at a loss. When you make a profit on the sale of your home, you ought to declare it. This report is expected to be filed on schedule D and is classified as a short term capital gain. However, if the home has been in your possession for more than one year, the profit should be declared as a long term capital gain.

To calculate the profit or the loss, you use the same approach as when calculating capital gains. This, you are supposed to make subtractions of your cost basis from the price at which you sold the home for. This formula works out in the following manner:

• Purchase price
• Plus purchase costs including title and escrow fees, real estate agent commissions, etc.
• Plus improvements such as the replacement of the roof, setting up a new furnace, and any other improvements.
• Plus the selling costs which includes title and escrow fees, real estate agent commissions, and any other such costs.
• You subtract accumulated depreciation for example, if you ever took the office in the home deduction.
• Then you arrive at the cost basis.

The following is the approach to calculating your profit or loss.

• There is the selling price from which you subtract the cost basis so that you arrive at the gain or loss.

When you get a positive number, it means that the sale of your home resulted into profit. However, when you arrive at a negative figure, this means that you sold your home but you incurred a loss. You can then arrive at the taxable gain figure by taking gain and making a subtraction of the maximum or partial exclusion and you arrive at the taxable gain.

It is never easy for most people to determine what their cost basis is when they sell their home. Most people can easily recall what they paid their home for. However, when they have to make all the additions of the remodeling and improvements that they have put into their home over the years, they might find this to be quite burdensome. While this might be a quite a tedious process, it is a process that is very advantageous for homeowners. Without keeping track of any spending that goes towards remodeling and improvements on your home, you will be losing out on your capital gains. So if you are a homeowner, it is vital that you determine what the tax consequences of selling your home will be before you put it in the market.