Life Events

Many homeowners can sell their main home and owe little or no federal tax on the profit, but only if they plan ahead and keep good records. The rules reward people who understand how the gain is calculated.

How the gain is figured

Your gain is generally the amount you realize on the sale (the price less selling costs such as commissions and certain closing fees) minus your adjusted basis. Basis starts with what you paid for the home, plus purchase closing costs that are added to basis, plus the cost of capital improvements. Basis is reduced by items such as casualty loss deductions or depreciation if you used part of the home for business or rental.

The home sale exclusion

If you meet the ownership and use tests, you can exclude a significant part of the gain from income. In general, you must have owned the home and used it as your main home for at least two of the five years before the sale. The exclusion is larger for joint filers who both meet the use test. You can usually use it only once every two years. Check the current amounts and conditions at irs.gov.

Partial exclusion

If you sell before meeting the two-year test because of a work-related move, health reasons or certain unforeseen events, you may qualify for a reduced exclusion.

Ways to improve your result

• Track improvements. Additions, a new roof or a remodeled kitchen raise your basis. Routine repairs do not.
• Keep closing documents from both your purchase and your sale.
• Time the sale so you meet the two-year test, if you are close.
• Consider the whole picture if you have a home office or rented part of the home, since depreciation may not be excludable.
• Remember losses. A loss on a personal residence is generally not deductible.

When tax may still be owed

Large gains in high-appreciation markets, homes used partly as rentals, inherited or gifted properties, and second homes follow different rules. Gains above the exclusion are generally taxed as capital gains, and the rate depends on how long you held the property and your income. Some higher-income taxpayers may also owe an additional tax on net investment income.

Reporting

You may need to report the sale even when the gain is fully excluded, for example if you receive Form 1099-S.

Before you list, contact us and we can estimate your gain and look for options that fit your situation.