Let’s start with the amounts that could be excluded from inclusion in your income if certain criteria are met. If you are single, potentially $250,000, and if married filing joint, potentially $500,000.
I mentioned meeting criteria.
1. Your home qualifies if the following are true:
a. You owned the home AND used it for at least 2 years out of the previous 5 years. This does not have to be consecutive time, if you used it for 730 days out of the previous 5 years, you qualify for the exclusion.
b. You did not acquire the home as part of a like-kind exchange (also known as a 1031 exchange). If you received the home during an exchange of another home, business, etc, you cannot claim the exclusion.
c. You did not claim any exclusion for a sale of a home that occurred during a 2 year period ending on the date of sale of the home of the sale you now want to exclude.
2. You are automatically Disqualified from exclusion if;
a. You acquired during a like kind exchange (explained above)
b. You are subject to the expatriate tax.
There are certain situations and of course variations to the items listed above.
Giving the house to a former spouse as part of a divorce settlement, giving the property up in a like kind exchange, selling adjacent vacant land as part of the sale, etc, are a few and will affect the amount of exclusion you may be eligible for.
There are also different situations that could possibly reduce the amount of exclusion by a percentage.
Determining Your Gain or Loss
When preparing your taxes, you’ll need to know some numbers. The simple calculation is:
= Gain or loss
Adjusted basis is the original price of your home:
Plus any additions you made to your home such as certain fees paid, costs that you as the buyer paid for the seller in the original purchase of the home, or improvements to your home. There are certain items that cannot be included in the adjusted basis of your home such as painting (interior or exterior), fixing leaks. For a complete list, refer to IRS Publication 523, or of course, call us.
How to figure your gain or loss:
The worksheet in IRS Pub 523 will walk you through the calculations.
What To Do Once You Determine Your Gain or Loss:
1. If you have a gain that is not excludable, report on form 8949 (generally) as a short term or long term transaction depending on the length of time you’ve owned the property.
2. Complete Schedule D, Capital Gains and Losses using the information from form 8949.
Note that using your home as a business and claiming items such as depreciation will affect your basis.
This is in the simplest form as I could without recreating the whole IRS publication. As always, no two situations are alike, and there will always be outlying factors that have an effect. We make no claims to being able to include all information in this blog, and I cannot answer all questions without reviewing your specific circumstances in full. This is in no way legal advice, it is just a quick reference if you are thinking about selling your home, and have questions about how it affects you. As always, please call us with any questions. We are always here to help.