Maximizing your tax benefits when selling a home involves knowing which real estate tax questions to ask. If you realize a profit on the sale of your home, that income could be taxed. Alternately, if you take a loss on the sale of your home, you won’t pay taxes on the funds you receive but that loss cannot be deducted from other income.
The following answers to the more pertinent real estate tax questions you should ask when selling a home will help you better understand your tax obligation.
How much can I exclude from the sale of my home?
If you meet certain criteria, up to $250,000 of the gain can be excluded if you file separately and $500,000 if you’re married and file jointly.
How do I determine if I qualify for the tax break?
In addition to the amount of profit realized from your home’s sale, how long you’ve owned and lived in your home determines whether or not you have to pay a capital gains tax. There are two requirements (called tests) you must meet before the profit from your home’s sale can be considered tax-free.
- What are the two tests?
Do the periods of residence and ownership have to be continuous?
No. You meet the residence and ownership standards if you can prove you lived in and owned the home for 24 full months or 730 days in the five years before the sale date, which is usually the closing date.
Are there any other requirements for excluding the gain?
Yes. To get the maximum exclusion, you must also satisfy the Look-Back requirement. It states you cannot have excluded the gain from selling a home within the previous two years nor do you intend to do so on a return or amended return for the previous two years that has not yet been filed.
What if I take vacations and rent my home out while on vacation?
The IRS recognizes short periods away from your home – including vacations – as time spent living in the home, even if you rent your home out while you’re on vacation. For extended periods living away from your home, check with your tax adviser to ascertain whether or not that time can be considered for the residence test.
What if I own and live in more than one home?
You must determine which of your homes is your main home. The IRS considers the home where you spend most of your time as your main home and uses what it calls a “facts and circumstances” test that looks at your USPS address and the address listed on state and federal returns, your driver’s license, car registration and voter registration. Other factors may be considered.
For more information about the real estate tax questions you should ask when selling a home, refer to IRS Publication 523: Selling Your Home. Tax matters can be complicated and confusing. For help with all of your tax and audit needs, contact Ernst & Wintter Associates today.