With summer as a peak season for selling homes, it is necessary to understand the tax consequences. If you recently put your home on the market, chances are that you’re probably focused on:
- How quickly you will be able to sell
- How much you will get for it
However, there is more to consider as far how the selling of your home will affect your tax bill for 2018. Talking to your accountant prior can help you understand the best way to proceed on how and when to sell your home.
Tax lax changes under the ‘Tax Cuts and Jobs Act’
The original version of the tax reform included a provision tightening the rules for the home sale gain exclusion. Lucky for us all, that provision didn’t make it into the final version that was signed into law.
This means that if you are selling your principal residence, there is still a high probability that your accountant can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To qualify, you must meet the requirements. For example, 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 cannot use the exclusion more than once every two years.
Other tax considerations
Any gain that does not qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you did not own the home for at least a 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.
Here are some additional tax considerations when selling a home:
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. If you’re selling a second 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. Or you may be able to deduct a loss.
A big investment
Your home is likely one of your biggest investments, so it is important to consider the tax consequences before selling it. If you’re planning to put your home on the market, please contact your accountant. We can help you assess the potential tax impact before selling and the best way to proceed to lower your tax bill. Contact us to learn more.