Selling your home and moving to a new one is an enormous undertaking. While you’re excited about your new home, there are many tasks to be completed. But what about the tax issues? Do you have to pay tax on any gain on the sale? Can you deduct a loss?
The first thing you need to know is that, generally, any gain from selling a personal-use asset is taxable, and any losses are non-deductible. So, if you sell your home for a loss, there is no tax benefit. But what about gain?
Gain is determined by the sales price over the basis. The basis in your house includes several components, such as:
- Purchase price (the price you paid for the home)
- Real estate taxes (if you paid real estate taxes the seller owed)
- Settlement costs (basically, the closing costs)
- Building costs (if you’re building a house, the basis is the cost to build it)
- Certain assessments (storm drains and sidewalks, for example)
- Capital improvements (building an addition or adding central air)
If there is a gain on the sale of your personal residence, you may have to pay tax on that gain. However, there is an exclusion under Internal Revenue Code §121 that applies to most people. What it means is that if you meet certain requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain from your income. Not bad.
What are the requirements? You must have owned the home and used it as your principal residence for at least two of the five years before the sale. For the most part, if you’ve owned your home for more than two years, the exclusion will apply, at least in part.
If you’re selling your house, and need advice, give me a call and I can help you understand the tax implications.