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Tax Considerations Before Putting Your House on the Market

June 26, 2014

Planning to sell your house? Consider these tax implications.

Summer is officially here, and with it, the primary residential real estate selling season. As you shop around for houses and prepare your own home for potential buyers, take into account how taxes will factor into your ultimate profit.

Home Sale Gain Exclusion Tax Break

Thanks to the home sale gain exclusion tax break, the profit from the sale of your home could be free from Federal income taxes and perhaps State income taxes as well. If you are a single homeowner, you can potentially gain up to $250,000 without owing any Federal income tax. For married homeowners who file jointly, you have grounds to gain $500,000 without paying any tax. However, qualification for these gains for married couples rests on passing two tests:

  1. Ownership Test: For the five-year period ending on the sale date, you must have owned the property for no less than two years.
  2. Use Test: For the same five-year period, you must have had the property as a principal residence and used it for a minimum of two years.

To qualify for the $500,000 gain, both spouses must pass the use test but only one spouse necessarily needs to pass the ownership test. In addition, if you used these rules to exclude a gain from an earlier primary residence, you must wait a minimum of two years before benefiting from the gain exclusion break another time.

Premature Sales

If you fail either of the above mentioned tests, you typically cannot be eligible for the Federal home sale gain exclusion break;however, there are a few exceptions. If you do not follow the basic timing guidelines and your premature sale is on account of something like a job transferor health issue, you may qualify for a reduced exclusion. Though this is a reduced exclusion, it can be large enough to protect your profit from Federal income tax.

Keep in mind that members of the military, foreign service, and those in the government agency or private industry who were sent overseas, have more leeway when it comes to the time limit requirement.

Income Tax

Gains above the exclusion level are subject to income tax, so be sure to add in these factors to the original cost of the home:

  • Closing costs from any refinancing or equity line loans that were made during the period of your possession of the home.
  • Capital improvements to the home including new roof, landscaping, hot water heater, but not painting or basic repairs and maintenance.
  • Any other costs associated with the home that were never deducted on tax returns.

The home sale gain exclusion regulations are relatively easy to follow. Every two years you can benefit from this and gain substantial profits. Be sure to lay out all your options, and consider your eligibility.

For more information, please contact any member of our Tax Services Group or refer to both IRS Publication 523 and the KLR Tax Guide.

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