Tax Consequences

Always consult an expert on taxes before you make financial decisions
based on tax deductions or tax laws as they change very often.

If you sell your home, apartment or duplex, for a profit, don’t jump too quickly to the conclusion that you’ll be taxed for your gains. You might be surprised to find otherwise. Also, some of those out-of-pocket fees you paid in the process of selling your property will work to your financial advantage.

This is the good news: You won’t be taxed or even required to report the sale of your home unless your gain is more than $250,000 ($500,000 if married filing a joint return). This is called the exclusion rule, and it applies only if you’ve owned the home for at least two of the last five years leading up to the sale, and lived in the house as your main home for at least two of the last five years.

It’s not the amount of money you receive for the sale of your home that determines whether you’ll have to include any proceeds as taxable income, but the amount of gain on the sale over your cost, or basis.

If you can exclude all of the gain, you won’t need to report the sale on your tax return. (You will likely receive a notice from the IRS requesting information to show your entitlement to the exclusion.) Generally, you may claim this exclusion only once in any two-year period.

If you sell your home for a profit in excess of the $250,000 limit, the additional amount is taxed as long-term capital gain.

Exceptions to the Rules

Even if you don’t meet the two-year rules (they’re called “ownership” and “use” tests), the IRS says there are some cases in which it will make exceptions and all the exclusion. But, the maximum amount you can exclude will be reduced. For example, the IRS says it will allow a reduced exclusion if you did not meet the “ownership” and “use” tests on a home you sold due to health reasons, a change in place of employment, or an “unforeseen circumstance.” Also, the IRS says that if you did not live in your home the required two years during the five-year period and are a member of the uniformed services or Foreign Service, it may still make an exception and grant an exclusion.

If you realize a loss on the sale of your home, the loss is not deductible. And if your home is sold in a bank foreclosure or repossession, that’s treated the same as a sale, meaning you, as the borrower/seller, may realize gain or loss.

Related Tax Deductions

The “points” you paid to get the loan on the house you’re selling are generally deductible the year you paid them. But if you haven’t deducted all the points you paid to secure a mortgage on the home, you may be able to deduct the remaining points in the year of sale. One example is if you were deducting points paid on a loan on the home you’re selling over the life of the loan, you may be able to deduct any points you hadn’t deducted in prior years. (“Points” includes loan placement fees, and are also called loan origination fees, maximum loan charges, loan discount or discount points.)

If you’re buying another home and took out a new loan, you’ll be able to deduct points (and interest) on your new loan, any remaining points left on the old home, and the real estate taxes paid on both homes. Real estate taxes are usually divided so that the seller and buyer each pay taxes for the part of the property tax year that each owned the home.

Though they may not be taken as tax deductions on your return, your selling expenses — such as commissions, advertising fees and legal fees, and even points, can be used to reduce the gain on the home you’re selling.