Spring and summer are busy seasons for selling a home. Interest rates are currently good and buyers are out looking for a new place. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14% during the week of May 2, 2019, while the 15-year mortgage rate was 3.6%. These rates are down a bit, 0.41 and 0.43% (respectively) from a year earlier.
If you are thinking about selling, you may want to think about the taxes on selling your home before talking with your realtor.
Sellers can exclude some gain
If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax.
However, to qualify for the exclusion, you must meet these tests:
- The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
- The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)
You cannot use the exclusion more than once every two years.
Handling bigger gains
If you have more than $250,000/$500,000 of profit when selling your home, any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate – provided you owned the home for at least a year. If you didn’t own the home for at least a year, the gain will be considered short term and subject to your ordinary income rate. This could be more than double your long-term rate.
Other tax issues
In addition, you should also consider these issues when selling a home:
Keep track of your basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
If you’re selling a second home, such as a vacation home, it won’t be eligible for the gain exclusion. However, if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
Your home is probably one of your largest investments. Before selling, make sure you understand implications for taxes on selling your home. We can help you plan ahead to minimize taxes and answer any questions you have about your situation.
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