Many Americans dream of owning a home. And, when you are ready to sell that home, it is important to understand how to calculate your home’s adjusted basis and whether the sale may effect your tax return. The good news is, you may qualify for an exclusion of some, or all, of the gain from the sale.
Here are a few of the more important considerations you want to keep in mind when you are thinking about selling your home:
To qualify for the gain exclusion, you will need to determine whether you have met both the ownership and use tests, which is done by looking at the 5 years immediately preceeding the sale of your home. If, during this time period, you owned the home and used it as your main residence for at least two years, you will generally meet the ownership and use tests. The two years do not need to be consecutive; for instance, you can live in the house in Year two and Year five and still qualify.
When you sell your main home and have a gain on the sale, you may be able to exclude up to $250,000 of the gain from your taxable income, or up to $500,000 if you are married and file a joint return with your spouse. Homeowners excluding all the gain generally do not need to report the sale on their tax return.
If you sell your house for less than you originally paid for it, you may experience a loss on the sale. Unfortunately, this loss is not deductible; nor can it be used to reduce other capital gains.
If you own multiple homes, you may only apply the gain exclusion to sale of your main home, also referred to as your principal residence. Gains realized from the sale of other properties, such as a vacation home, are treated as capital gains and subject to tax accordingly.
In case you do not qualify for an exclusion of taxable gain, or if you chose not to claim the exclusion, you must report the gain from the sale of the house, in the year of the sale, when you file your tax returns.
Some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers may qualify for exceptions to the above rules.
IRS Publication 523, Selling Your Home, offers worksheets to help you calculate the adjusted basis of your home, the amount of gain or loss on the sale, and the gain excluded.