Are You Planning To Sell A Home?

August 8th, 2011

The goal for the information in this website is to disseminate  information, and not to provide tax advice.

You should review the appropriate Federal and state tax rules, and work with your tax return preparer, if you are planning to sell a “home”, even if it is not your “main” home.  IRS Publication 523 (“Selling Your Home”) is an excellent place to start.  http://www.irs.gov/pub/irs-pdf/p523.pdf   There is a wealth of information in this 40-page document. 

If you received or were eligible for the “First-Time Homebuyer Credit” in 2008 you should also review the instructions for Form 5405 at http://www.irs.gov/pub/irs-pdf/i5405.pdf  The provisions of this tax credit went through several changes from 2008-2010.  For example, if you received the tax credit for a home that was purchased in 2008, the “tax credit” was in fact a loan that is subject to repayment beginning in tax year 2010.   If you have sold your main home that qualified you for the credit, the entire amount of the previously received credit was an addition to your 2010 tax liability.  If you still live in that main home, your re-payment requirement commenced in 2010 and is due to be repaid in equal amounts over the next 15 years.

Additional points to consider are:

  • A “Main Home” can be a house, houseboat,  mobile home, cooperative apartment,  or condominium;
  • For the year of the sale, and if you meet the requirements, you may be able to exclude up to $250,000 of the “gain” on the sale.  Married taxpayers filing a joint tax return may exclude up to $500,000.  “Losses” on a sale are not deductible;
  • The “gain” exclusion tax benefit is applicable only for the sale of your “main” home.  Second homes do not qualify and are usually subject to capital gains tax treatment;
  • There is a requirement for you to have actually lived in your main home for two of the five years prior to the sale.  However, if you are qualified, there are special rules for a reduced exclusion amount if the reason for the sale is a) change of employment location, b) health reasons, or c) “unforseen circumstances”, all of which are defined in the publication;
  • Additional special rules and calculations are applicable if you used your main home for your business or as rental property;
  • Be sure to keep a complete (all pages), signed copy of the Housing and Urban Development form (HUD-1) from both the purchase and sale of your old home, and the the purchase of your new home; 
  • The rules will apply if your former residence is no longer your “main” home (i.e. you retired, moved from New York to Florida, and you did not sell your former residence in New York). 

Ten Tax Tips for Individuals Selling Their Home 

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.

  1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
  2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
  3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
  4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
  5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
  6. You cannot deduct a loss from the sale of your main home.
  7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
  8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
  9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.
  10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Publication 523, Selling Your Home (PDF)
  • Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (PDF)
  • Form 8822, Change of Address (PDF)

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Posted by Bill Seabrooke