Home News What You Need to Know About the Home Sale Exclusion and Your Taxes

What You Need to Know About the Home Sale Exclusion and Your Taxes

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Despite slowing down a bit, the residential real estate market is still active, and like most homeowners these days, it’s likely that your property has appreciated in value since you bought it.

Ultimately, when you sell your home, you need to determine the impact of income taxes on its built-in valuation.

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Many homeowners are aware of the general tax rules for home sales. Gains up to $250,000 ($500,000 for a couple filing a joint tax return) are tax-free if you owned and lived in the original home for at least two of the five years before the sale. Excess earnings are taxed at long-term capital gains rates ranging from 0% to 23.8% depending on taxable income. Losses on the sale of primary homes are not deductible.

Suppose you are married, purchased a house in 1995, have a tax base of $150,000, and sell the house for $500,000 this year. All profits of $350,000 are tax-free. Consider the same example, except you sell your house for $775,000. The first $500,000 of earnings is tax-free and the remaining $125,000 is taxed at the long-term capital gains tax rate.

To determine the profit or loss from the sale of a home, start with the total revenue reported in Box 2 of Form 1099-S and subtract sales expenses, such as commissions, to arrive at the realized amount.

Then reduce that figure by your home tax base. To calculate your tax base, start with your original costs, add in certain settlement and closing costs, and add on any additional costs to increase your home’s value, extend its useful life, or adapt it to new uses. add the cost for

Even if you must sell your home before meeting the two-year use and ownership tests, you may still be eligible for some of the $250,000/$500,000 exclusions, depending on your circumstances. Sales due to other unforeseen circumstances are covered.

The eligible exemption percentage corresponds to the two-year period in which the home was used as a residence.

Let’s say you bought a house for $450,000 in April 2021, lived in it for 18 months, left the state for work in September 2022, and sold it for $520,000.

The max profit exclusion here is $187,500 ($250,000 x (18/24)). Therefore, all profits of $70,000 are tax-free. You can use days or months for this calculation.

Convert Vacation Home to Primary Home

If you convert your vacation home into your primary residence, live there for at least two years, and then sell it, you may not get a full home sale exemption. The portion of the $250,000/$500,000 non-exempt, and therefore taxable, profit is a percentage of the total hours during which the home was used or rented out as his second residence, beginning in 2008. Based on that the seller owned the house;

Remaining profits are subject to exclusion.

Sell ​​your house immediately after your spouse’s death

Spouses who sell the family home within two years of the other spouse’s death will receive $500,000, usually available only to the couple, provided the two five-year ownership and use tests are met prior to death. Get full exclusions for

There are also additional tax benefits if you own the home jointly with your spouse. If you don’t live in a community property state, half of the home is stepped up in the tax base based on the death of the first dying spouse. If the first spouse dies, the entire tax base is raised to the fair market value. Here is an example. Let’s say you and your spouse purchased her $100,000 home in a non-communal state many years ago. The survivor’s home tax amount jumps to her $525,000 (half of her original $100,000 plus half of the deceased spouse’s death date price of $950,000). Twenty months later, the surviving spouse sells the house for her $995,000. Earnings of $470,000 ($995,000 to $525,000) are tax-free

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