If it’s been more than a few years since you sold your last home, the tax rules have changed. You no longer have to roll over your gain into a new home, for example, and you don’t have to be 55 years old.
Calculating Gains and Losses
For tax purposes, when you sell your home, you can exclude up to $250,000 of gain—$500,000 if you’re married—as long as you satisfy three basic tests: You cannot have excluded gain from the sale of another home within the last two years. In addition, you must have owned your home (ownership test) and occupied it as your main home (use test) for two of the last five years.
If you own more than one home, only your main home qualifies.
You calculate your gain on the sale of your home as follows:
Begin with the selling price. This is the total amount you received, including money, any notes or mortgages the buyer assumed, and the value of any other property you received. If the buyer also paid you for items of personal property (furniture, for example) that amount is not included in the selling price.
Then deduct your selling expenses. They include such things as advertising costs, sales commissions, loan charges or legal fees. The result is your amount realized. Next deduct your adjusted basis. In very general terms, your adjusted basis is the original cost of your home (including certain closing costs), plus the value of any significant home improvements you made while you owned it. (And don’t forget, if you previously deferred a gain under the old rollover rules, you need to reduce your basis by that deferred gain.) If you inherited your home or received it as a gift, your adjusted basis may reflect the home’s fair market value or the adjusted basis of the person who gave or bequeathed you the home. If you received your home in a trade, your adjusted basis is based on the adjusted basis of the home you traded for it.
The result, if positive, is a gain. If it is negative, you have a loss.
If you used a portion of your home for business (or rental) purposes, you may still qualify for the exclusion. However, you cannot exclude the amount that you depreciated as a business expense after May 7, 1997. (As an alternative, it may be possible to defer these taxes if you invest in a new home by using a 1031 like-kind exchange.)
Of course, you can always choose not to claim the exclusion and to recognize the gain in your gross income. For example, you might have another home that will qualify for the exclusion in less than two years, and that home has a larger gain. You can also change your decision at any time within three years of the due date of your tax return for the year of the sale.
There are a number of other situations that can affect how you report the sale of your residence for tax purposes. For example, you cannot claim the exclusion if you acquired your home in a 1031 like-kind exchange and sold it after October 22, 2004 or within five years after acquiring it. It is also important to understand the documentation you must save, and how long to save it.
For additional, general information, you can refer to IRS Publication 523, Selling Your Home. And you can always contact us to discuss your specific situation.