Selling your home can significantly impact your bottom line. Depending on how long you’ve lived in your home and the nature of your move, your tax liability, as well as what you can deduct, changes.
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“For most people, a home is the single biggest investment they make so you want to maximize the tax benefits you get from that,” says Susan Howe, certified public accountant in Philadelphia.
You may receive a tax break on the gain from selling your principal residence depending on whether you meet the eligibility criteria. Experts suggest planning your home sale so you maximize your sale proceeds and gain, or the difference between your sales price and what you paid for your home.
“If you’re thinking of retiring and moving away to a different state, you want to plan when you sell your house so you have the money when you buy a house in the new location,” says Michael Eisenberg, a certified public accountant in Los Angeles. “You want to plan in advance the time of year when you sell your house as well.”
You may owe taxes or benefit from deductions, and experts provide answers to questions about these.
Is the gain from a home sale tax-free?
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Up to $500,000 for married couples with a jointly owned home and $250,000 for single people of the gain is tax-free on the federal level. “Once you go beyond the exception, you’ll be subject to capital gains,” says Lauren Foster, certified public accountant in Chicago.
The gain is tax-free in most states, too, but every state is different and experts advise checking your state’s rules.
Is there a residency requirement?
To benefit from the tax-free gain, you must live in your home for at least two of the five years leading up to the sale. “If you keep the house and rent it for more than three years, you’ll lose that tax-free benefit so planning for the sale is very important,” says Eisenberg. The process starts again once you buy a new home.
Are there exceptions?
“Everybody’s circumstance is different so you want to know how your personal situation will qualify or disqualify you from the main capital gain exemption,” says Foster.
Your eligibility criteria changes if you’re disabled, own more than one home, or your home was destroyed in a casualty, for example, or in the event of marriage, separation or death. If you have a disability, for example, the residency requirement becomes 12 instead of 24 months out of the five years.
“If you’re going to sell your home, you should read [Publication] 523, which is the IRS publication for selling your home,” suggests Foster. “It explains how you would or wouldn’t qualify.”
How is the gain calculated?
The gain or loss is your home’s sales price minus your basis. “When you’re selling your home, nothing is flat out deductible,” says Howe. “It all goes into the calculation of the gain or loss.”
Basis. What you paid for your home plus the cost of any renovations or repairs is your home’s basis.
“The general rule for adding something to the basis as opposed to a personal expense is that it needs to add to the value of the home or increase the life of the home,” says Howe. For example, planting a tree would add to the value of your home, but paying for general lawn maintenance doesn’t affect the basis. Painting could add to the basis since this increases the life of your home.
“Those improvements, depending on what they are, may disappear over time,” says Foster. “If you owned you home for 30 years and at some point, replaced your furnace, it loses its value.”
You also need accurate records to correctly calculate the basis, which may be a problem if you’ve lived in your home for years and weren’t organized, says Foster. “The onus is on the taxpayer.”
Although your gain won’t be tax free on second homes and investment properties, if you have a gain when you sell these, the basis is calculated similarly, advises Howe.
Sales proceeds. Your adjusted sales price is your sales price less everything listed on the settlement sheet, like the real estate commission, document fees, lawyer fees, appraisal fees and transfer tax.
Fixing-Up Expenses. “These are costs you have to fix your property to get it ready for selling,” says Howe. You may make minor repairs and paint with the goal of maximizing your sales proceeds, but these repairs must be made within 90 days of your home’s sale.“You may have $500 worth of expenses — those also are costs that you can deduct from the proceeds to lower the gain,” says Howe.
Can I deduct moving expenses?
“[Moving expenses] are the best deduction that you can get because they’re dollar for dollar off your income before your tax is calculated,” says Foster.
To be able to deduct moving expenses requires meeting the time test, distance test and employment test — you can only deduct moving expenses if you move for a new job. “If you move and it isn’t in connection of your employment, those expenses aren’t deductible,” says Howe. Your new home must also be more than 50 miles farther than your current workplace and current commute. The time test requires you work full-time at your new job for 39-weeks out of the first 12 months in your new location.
Any reimbursement from your employer reduces the amount of your deductible expenses. “Moving can be expensive and if you don’t have an employer that’s willing to pay for it, that’s a big chunk,” says Howe.