Selling a home entails many difficult and emotional decisions.
Beyond the emotional bonds we form to where we live and raise our children, it is often the most important financial decision a family can make.
Selling the family home can provide many financial benefits if handled properly. It’s important to get sound tax advice to help to you take full advantage of this important step.
Here are 5 pieces of tax advice2 which can guide you through the decision to sell your home.
1. Two Year Permanent Residence Requirement
Homeowners need to have lived in the house they are selling for two years as permanent residents in order to gain full tax benefits.
The “Primary Residence Exclusion” allows owners to avoid most tax liabilities on the sales of their homes.
If you are single, you may exclude up to $250,000 in profit on the sale of your primary residence. If you are married, that amount goes up to $500,000.
However, to take this tax exemption, you must have lived in the house for at least two out of the five years preceding the sale.
If you sell the house in less than two years, you may be subject to capital gains taxes.
A professional will be able to advise you on ways to reduce the capital gains tax: for example, if you had to sell due to a job-related move, you might be eligible for some exclusions.
2. Exemption Available Every Two Years
For homeowners who are buying and selling multiple properties, the qualification “primary” is important.
It may seem obvious, but you cannot take advantage of the primary residence exclusion on more than one home. It has to be primary!
If you are in the business of “flipping” or simply selling more than one house over the course of less than two years, talk to your accountant for tax advice3 on how to reduce your tax liabilities.
3. Deduct Home Improvements
You can also reduce the amount of profit you expect from the sale of a home by deducting improvements to the property.
A renovated kitchen, a new roof or an updated security system may all add value to your house.
When you are selling, these capital improvements will be used to lower the adjusted basis (the original cost of your home less the improvements made since you owned it).
4. Don’t Report the Sale
When you are getting ready to sell, you may have the option to attest ahead of time that you will not have a taxable gain on the sale.
A real estate agent should be able to provide a form to this effect.
With this form in place, the realtor will not send a Form 1099-S to the IRS and you will not have to report the sale.
5. Seek Professional Tax Advice4
The tax code is constantly changing, so it is important to consult with a tax expert when you make the decision to sell.
A CPA or tax attorney will give you important advice on timing, staging expenses and other items which could have a big impact on your tax liability and final profits from the sale of your home.
Take Stock Before You Sell
Following these five simple steps will help prevents some common sellers’ mistakes.
To get the maximum tax benefits from the sale of your home, go through this simple check list so you can take advantage of every legal option available. And if you need help or have questions, send us a message.