Selling your home? Be aware of the tax consequences.
Summer is the peak time for home sales. But if you are thinking of putting your home on the market, in addition to considering the best purchase price and making plans for your next residence, consider the tax consequences.
Home sale gain exclusion remains intact
The good news is that although the original House of Representatives’ version of the Tax Cuts and Jobs Act included a provision to tighten the rules for the home sale gain exclusion, it did not make the final version that was signed into law.
Therefore, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8 percent net investment income tax.
You must meet certain criteria to qualify for the exclusion such as you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.
Additional tax considerations
If you owned your home for at least one year, any gain that doesn’t qualify for the exclusion, generally will be taxed at your long-term capital gains rate. If you owned your home for less than one year, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.
Other facts to consider
Tax 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.
Losses. A loss on the sale of your principal residence 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.
Second homes. Be aware that when selling a second home, it won’t be eligible for the gain exclusion. But 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.
A big investment
Your home is likely one of your biggest investments. If you are planning to sell it, it’s a good idea to consult your tax advisor to assess the potential tax impact before you call the realtor. We can help. Contact Shlomo Benzaquen, Ciuni & Panichi, Inc. Tax Department Senior Accountant, at 216-831-7171 or by email here to learn more.
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