Selling Your “MAIN” Home!

 

 

 

Main Home Defined

This month’s article deals with the tax consequences of selling your “main” home. Notice I said “main” home, and not a second home, a vacation home, or a rental property. Generally, your main home is the one in which you live most of the time as your personal residence. It can be a single family home, a mobile home, a condominium, a duplex, a town-home, a houseboat, or a cooperative apartment. It does not include vacant land or investment real estate.

 

Two Tests Must Be Met

Two tests must be met to exclude the gain form taxation. You must meet both the ownership and use tests. This means that during the 5-year period ending on the date of sale, you must have (1) owned the home for at least 2 years AND (2) lived in the home as your main home for at least two years.

 

Maximum Amount That Can Be Excluded From Taxation

If both tests are met, the maximum profit that can be excluded from taxation is $250,000 if single and $500,000 if married filing jointly. Remember, that during the two year period ending on the date of sale, you must not have excluded gain from the sale of another home.

 

Calculating Your Gain or Loss

The following formula will calculate your net gain or loss on the sale---

Selling Price- Selling Expenses = Amount Realized

Amount Realized – Adjusted Basis = Gain or Loss

 

It is important to save your settlement statements when you purchase and sell any real estate.  These will have the figures you need in the formula above. Also, remember if you have a loss on the sale, you cannot deduct this loss on your tax return.

 

*One other important point that many taxpayers seem to be confused on. Settlement (closing) costs. When you purchase a home, these costs are NOT deductible. Rather they are added to the basis of your home. When you sell a home, theses costs are deducted from the selling price.

 

Reduced Maximum Exclusion

You can claim exclusion, but the amount of gain you can exclude will be reduced if either of the following is true:

(1)   You did not meet the ownership and use tests, but the reason you sold your home was due to

A-    A change in employment

B-    Health reasons

C-    Unforeseen circumstances

 

If this is the case, your gain excluded will be reduced using a formula in the IRS worksheets.

 

Reporting the Sale

If you can exclude all of the gain, you do not need to report the sale on your tax return.

If you have a gain that cannot be excluded, it is taxable and reported on Schedule D of Form 1040.

Special rules for a home used both for personal and rental purposes

You will need to modify the above rules for a home that is rented out currently, either entirely or simply a room rented.

 

Editors Note: Donald Scherzi is a Certified Public Account and a Certified Financial Planner. For questions regarding your finances or investments, call him at 746-1926 or email him at donaldcpa@bellsouth.net.  He has been a Heights resident since 1996. You may visit his web site at www.donaldscherzicpa.com for tips, strategies, and news to improve your total financial well-being.