Fall is a great time to seel your home, and if you’re planning to put your home on the market soon, you’re probably worrying about if it makes sense to give it a new coat of paint, or clean out the garage and basement. You are also probably worrying about how long it will take to find a buyer and how much you’ll get for it. But don’t forget there are tax consequences to consider that accompany that “SOLD” sign at the end of your driveway. The time to worry about the tax impact is before you put your home on the market.
Thankfully, the Home Sale Gain Exclusion was not affected by the Tax Cuts and Jobs Act, so if you’re selling your principal residence, you’ll still be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion also is excluded from the 3.8% Net Investment Income Tax (NIIT).
To qualify for the exclusion, you must meet certain tests. You must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. You are not allowed to use the exclusion more than once every two years.
Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If less than that, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate!
Think about the impact of these tax items when selling a home:
2. Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
3. Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
4. Rental property. The rules allow you to convert a rental property into a primary residence because the two-year residency requirement does not need to be fulfilled in consecutive years. Say you invest in a new condo and live in it for the first year, rent it for the next three years and, when the tenants leave, you move back in for another year. At the end of the five-year period, you can sell your condo and benefit from the Home Sale Gain Exclusion.
CONTACT US: After you contact a reputable real estate agent, call your Fuoco Group CPA to assess the potential tax impact of selling your residence. Your home is likely one of your biggest assets, so be aware of the tax consequences ahead of time. Contact us toll free to learn more at 855-534-2727.
