The tax deadline is just days away, so we figured it was the perfect time to talk about how selling a home can impact your filing. For first-time FSBOs, the prospect of taxes after a home sale may seem a little daunting. How do you factor in money made from a home sale? What if you’ve made profits from the sale of multiple properties during the year? Here are the main factors you need to consider as you file your taxes this year.
Disclaimer: we’re not tax professionals – please consult your financial advisor for an expert opinion.
Selling Your Residence
If you’re lucky enough to sell your home for a nice profit, there is another happy surprise in store for you come tax season; Uncle Sam wants you to pocket that home sale profit. That’s right, there’s no need to pay taxes on your home sale earnings as long as you meet the criteria outlined below.
Criteria for excluding your home sale capital gains from taxation:
- Must have owned the home for at least 2 years
- Must not have excluded the income from the sale of another home within the last 2 years
- Must have used the home as a primary residence for at least 2 out of the 5 years before the sale.
Assuming you do meet these criteria, you’re eligible for up to $250,000 in tax-free profits if you’re single or $500,000 in tax-free profits if you’re married and filing jointly. Keep in mind that you can only exclude this gain once each 2-year period. If you don’t meet these criteria, there are a few other exceptions for military personnel, moving due to unforeseen circumstances, etc. that you may qualify for. Check with the IRS to make sure that you meet the requirements to be eligible for this major tax break.
Selling Other Real Estate Property
Maybe you’re selling an investment property that is not your primary residence. Or perhaps you’ve already taken advantage to the tax exclusion within the last 2 years and don’t qualify for another tax exclusion. In these cases, you’ll have to pay taxes on the profits or “gains” earned through the sale of that property.
You’ll need the 1099-S form that the title, settlement company, or real estate agent filed at the time of the closing, and then you’ll need to calculate your gains. To do this, you need to figure out the purchase price, appreciation or depreciation, and capital improvements then subtract the sum of those from the sale price. Voila! Whatever is left over is your capital gain, and that is what you’ll need to claim on your tax return. If that all sounds a little overwhelming, use this handy home gain calculator to walk you through the process.
Investors should be careful to save receipts and documents from any capital improvements (not routine repairs, but renovations that add lasting value to a home) that they make to a property, however. Those are deductible and can be itemized on tax returns.
Now that you know the tax benefits and information needed for doing taxes after a home sale, you can go forth and file. For more specifics on home sales and taxes, visit the IRS web page on home sales.