Spring and summer are the optimum seasons for selling a home. And interest rates are currently attractive, so buyers may be out in full force in your area. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14 percent during the week of May 2, 2019, while the 15-year mortgage rate was 3.6 percent. This is down 0.41 and 0.43 percent, respectively, from a year earlier.
However, before you contact a realtor to sell your home, you should review the tax considerations.
Sellers can exclude some gain
If you are selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion also is excluded from the 3.8 percent net investment income tax.
To qualify for the exclusion, you must meet these tests:
- The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
- The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use do not need to overlap).
In addition, you cannot use the exclusion more than once every two years.
Handling bigger gains
What if you are fortunate enough to have more than $250,000/$500,000 of profit when selling your home? Any gain that does not qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you did not, 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 tax issues
Here are some additional tax considerations when selling a home:
Keep track of your 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.
Be aware that you cannot deduct a loss. If you sell your principal residence at a loss, it generally is not 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.
If you are selling a second home (for example, a vacation home), be aware that it will not 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. You also may be able to deduct a loss.
Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. We can help you plan ahead to reduce taxes and answer any questions you have about your situation.