While the process for home sales can be rather tricky as far as taxes are concerned, it’s not something that you won’t be able to manage as long as you know what you’re doing. To help you out, here are five things that you need to know when reporting a home sale.
Capital Gains May Be Excluded
The IRS offers a special exclusion for certain capital gains. To be eligible, you must have owned the asset for at least five years and have used it for personal purposes for at least two of those years. The exclusion applies to gains of up to $250,000 for single filers and $500,000 for joint filers.
Exceptions to Ownership and Residence Rules
If your client does not meet the above ownership and residence rules, they may still qualify for the exclusion if they meet certain exceptions. Some of the most common exceptions include taxpayers who are newly divorced or widowed, and members of the military or other government services.
Essentially, this means that if you are divorced or separated, you can claim any time that your former spouse owned the home as time that you owned the home. However, you must still meet the residence requirement on your own. If you are widowed, you can use the time that your late spouse owned or lived in the home to qualify, even if you do not meet the ownership or residence requirements on your own.
If you are in the military or another government service, you may be exempt from the 24-month residency requirement if your duties kept you from living in the home.
The IRS Publication 523 outlines different exceptions to the general rule that expenses related to the sale of a home are not tax-deductible. These exceptions include cases where the home is being sold due to a change in employment, health reasons, or unforeseen circumstances.
Limits on Excluding Gains
If your clients qualify, they can deduct up to $250,000 of capital gains from the sale of their home, or up to $500,000 for couples who are married and filing taxes jointly. This exclusion from the Net Investment Income Tax means more of their money can stay in their pocket.
Losses on a Primary Home Can Be Deducted
If your client’s home sells for a loss, they will not be able to deduct the loss from their taxes. The only time a loss can be deducted from taxes is if the property sold was a commercial property. If your client’s home does sell for a profit, they may be subject to paying capital gains tax on the sale.
Special Rules Apply to First-Time Homebuyers
If your client receives a federal mortgage subsidy or tax credit when buying a home, they may be required to pay some or all of it back when they sell the home. This is called recapture. Your client can use Form 5405, Repayment of the First-Time Homebuyer Credit, to see how much they may owe in recapture taxes or if they qualify for an exception.
Conclusion
We hope this article proves to be useful when it comes to helping you gain a better understanding of how taxes and home sales work. While it may be rather tricky at first, the information that we’ve discussed above should help make things easier for you and all parties involved.
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