Keep All the Profit When You Sell Your Home!
The Good News From the IRS About the Home Sale Gain Exclusion!
Our government considers home ownership important to the overall health of our economy. So, the IRS has provided a Home Sale Gain Exclusion. (See IRS Section 121 summary from Cornell Law School) It is possible for the profit (gain) from the sale of your main home to be excluded from Capital Gain Tax. Woohoo!!
“If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.” IRS Publication 701 – Sale of Your Home
What You Need to Know to Take Advantage of the Home Sale Capital Gain Tax Exclusion
In most cases, your home is exempt from paying Capital Gains Tax from the profit of selling your home as long as you meet certain conditions.
1. Principal Home Ownership and Use Test
- You Own the Home: minimum 2 years in the 5-year period before the sale date.
- Your Principal Residence: for a total of 2 years out of that same 5-year period.
- You haven’t excluded a gain (the profit) from another home sale in the 2-year period before the sale date.
The IRS defines your Principal Residence as follows:
“You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a “facts and circumstances” test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well… The more of these factors that are true of a home, the more likely that it is your main home.” You’ll find the complete list on page 3 of the IRS Publication 523 (2017).
2. Your Profit Exclusion Can Be Substantial
An individual tax payer may qualify to exclude up to $250,000 in gain (profit) on their income tax return or a married couple filing a joint return can exclude up to $500,000 of the profit from the sale of their primary home. In other words, you can profit $250,000 or $500,000, depending on your filing status, without owing any tax! This part of the tax code is truly your friend when you sell your principal home.
3. Other Requirements and Exceptions You Need to Know
You may also qualify for other exceptions such as for the Uniformed Services, the Foreign Service or the intelligence community, installment sales of property, moving due to a job change, and more. See the IRS Publication 523
4. Keep Track of Your Home Improvements and Keep the Receipts
Maintenance and repairs are a necessity in order to achieve top dollar when you sell your home. Unfortunately, maintaining your home in good condition is not a benefit as far as the Home Sale Gain Exclusion Rules goes. Maintenance and repairs may include painting a room, fixing a broken pipe or window, repairing the deck, etc.
But, the money you spend on home improvements add to your home’s Cost Basis which can reduce your Capital Gains Tax. A home improvement may include remodeling your kitchen, replacing the roof, adding a room, etc. For example, over the years, you have added a new deck with a cost of $5,000 and new landscaping for $10,000. The entire $15,000 can be used when you figure your Cost Basis. We’ll cover that next.
How to Calculate Your Gain (Profit) in 3 Steps
The formula for calculating your Gain (profit) involves subtracting your Cost Basis from your Sale Proceeds.
Step #1: Calculate your Cost Basis. Add together the amount you originally paid for your home, the closing costs, and the improvements that you have made over the years.
Step #2: Calculate your Sale Proceeds. Subtract the current selling price of your primary residence from your selling expenses. Generally, selling expenses are anything on the Seller Side of your closing statement that is prepared by a Real Estate Closing Attorney. Some examples are the Realtor commission, document preparation fees, NC Revenue Stamp Tax, etc.
Step #3: Calculate your Gain (profit). Subtract the Proceeds (Step #2) from the Cost Basis (Step #1). The result is your Capital
Here’s an Example of How the Home Sale Tax Exclusion Works:
Cost Basis: You purchased your home 5 years ago for $300,000. Closing costs were $6,000. You’ve made a few improvements for another $14,000. Your Cost Basis is $320,000.
Sale Proceed: Today your sales price is $400,000 minus Seller closing costs $25,000. Your sale proceed is $375,000.
Calculate Your Gain (Profit): Sale Proceed $375,000 – Cost Basis $320,000 = a profit of $55,000 tax-free.
Other factors that may enter into the above formula. Call or email the professional tax preparers at Carolina Business Services for a free consultation concerning your specific income tax return situation.
5. You Must Report the Sale of Your Property to the IRS
Your real estate closing attorney will provide you with a 1099-S for the sale of your home. You must report the sale of real property to the IRS on your next income tax return, even when no income tax is due. More information from the IRS can be found on the Form 1099-S.pdf, Proceeds From Real Estate Transactions.
6. The Quickest and Easiest Way to Find out How the Home Sale Gain Exclusion Applies to Your Income Tax Return
Contact the Tax Professionals at Carolina Business Services. Every year each Tax Preparer take courses to stay up-to-date with current tax law changes so nothing is missed that can save you money. You can take the guesswork out of accurately reporting the sale of your home to the IRS and avoid paying Capital Gains tax when you use their Tax Preparation Services.
Give them a call at 828-287-9595 or send an email for an free in-depth consultation concerning your specific tax preparation needs. They are happy to answer your questions.
Also, for extensive instructions you can read anytime, refer to the January 30, 2018 IRS Publication 523 (2017), Selling Your Home. The publication covers the complete rules and worksheets concerning the limitations on the exclusion amount, eligibility requirements, and exceptions to the 2-year rule for your 2018 tax returns. The 2017 Tax Benefits Provided by the Bipartisan Budget Act of 2018 that was released on March 14, 2018 provides information concerning the tax law changes.
Carolina Business Services Offers a Full Range of Tax Preparation Services
Check out all our Tax Preparation Services. We are centrally located in Rutherford County, North Carolina. Our closest towns are Forest City, Spindale, and Rutherfordton, North Carolina, but, we provide tax services nationwide. We are happy to answer your questions. Your first tax consultation is FREE!