Understand Your Tax Obligations When You Sell Your Home
- Review the tax implications when you sell your home for a profit.
- Understand the steps to take when you sell your home for a loss.
- Consult with a tax professional, whenever a Form 982 needs to be filed.
Avoid Tax Problems After You Sell Your Home
Selling your home is a big event that involves a lot of time and effort. The work does not end once the house is sold and not even after everything is packed up and moved into the new residence. One important item that you need to pay attention to is the tax implications when you sell your home. In fact, you should think about how your home sale will affect your taxes before you sell your home.
When you sell your home, whether you made money on the sale of your home or you sold your home at a loss, your taxes are affected. Review the following tax tips about selling your home, so you:
- Are properly prepared to achieve the best tax results you can
- Take advantage of any benefit the tax system allows you
- Know what you will owe the IRS, when you sell your home and it results in a tax liability
If you are struggling with IRS tax debt, get a no-cost, no obligation analysis of your options from one of Bills.com's pre-screened tax specialists.
Tax Implications When You Sell Your Home for a Profit
- $250,000-$500,000: You may be able to exclude up to $250,000 of the capital gain from your income for an individually filed return, and $500,000 on a joint return, in most cases, when you realize a capital gain from the sale of your primary residence.
- Primary Residence: In general, you must have resided in your home as your primary residence for two out of the past five years, prior to the sale, in order to be eligible to exclude the gain in income the sale brings you. If you own two homes and split your time between them, your primary residence is the one that you live in for the majority of the time
- Frequency: You can't claim the capital gains exclusion, if you previously claimed it for the sale of another home within two years of the sale of your home.
- Reporting: Basic IRS reporting requirements for filing your taxes after you sell your home include:
- You don’t need to report the sale on your tax return, if you can properly exclude all of the gain.
- If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
- Basis: The IRS provides worksheets inside Publication 523, Selling Your Home, so you can accurately calculate the adjusted basis of your home, how you much you gained or lost, and the amount that you are entitled to exclude.
- First-time Homebuyer Credit: You must repay the first-time homebuyer credit, if you received it and the property is no longer your primary residence within three years of the date of purchase. You are required to repay the full Repayment of the full credit is due with the income tax return for the year the home stopped being your primary residence. The full amount of the credit must be reflected as additional tax on your tax return for that year.
Tax Implications When You Sell Your Home for a Loss
Many Americans are in the unfortunate position of owing more than their homes are worth, due to a steep decline in property values. If you sell your home for less than you owe on it, there are important tax implications you need to know about.
- Loss: You cannot deduct a loss from the sale of your main home.
- Mortgage Debt Forgiveness: If you short-sale your home, do a deed-in-lieu of foreclosure, or experience a foreclosure, it may be the case that your lender will forgive some or all of the money you still owe on your mortgage, after the sale price is applied to your mortgage balance. When debt over $600 is forgiven, you can end up with a tax liability, because the forgiven debt is considered “income” for tax purposes. Fortunately, The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude income forgiven debt on their primary residence. There are restrictions, such as:
- The mortgage debt forgiveness must have taken place between 2007 and 2012. (Editor’s Note: The original 2012 deadline was extended to debts forgiven in 2013. There is discussion about extending the deadline to 2014, but the protections of the law do not currently cover any mortgage debt forgiven after 2013. Bills.com will report on any developments that take place.)
- There is a cap on how much forgiven mortgage debt can be excluded. Up to $1 million of forgiven debt is eligible for exclusion, $2 million if married filing jointly.
- You cannot exclude the forgiven mortgage debt if the forgiveness is due to services performed for the lender or any other reason not directly related to a decline in your home's value or your financial condition.
- You must use the IRS Form 982 to report the debt forgiven and attach it to your tax return. As the Form 982 can be confusing, consult with a tax professional to make sure that you fill it out properly.
Any time you you move, it is important to update the IRS with your new address, so you receive any tax refunds or IRS letters or notices that are sent to you. You can use the IRS Form 8822, Change of Address, to notify the IRS of your address change.