Sale of home
If you are considering selling your home, there may be a tax advantage. IRS Publication 523 entitled Selling Your Home www.irs.gov/pub/irs-pdf/p523.pdf explains all the rules in 40 pages, including examples and worksheets to assist in the calculation of the taxable gain on the sale of your home. I will try to give you the basics in 500 words or less (without the worksheets).
If you sell your main home, you can exclude $250,000 from the gain on the sale from your taxable income if you meet certain requirements. A married couple filing a joint income tax return can exclude $500,000. The basic requirements are that you owned and lived in your main home for two of the last five years as of the date of the sale. There are some who may qualify for a reduced exclusion if they do not meet the ownership and residence tests. The exceptions apply to those who become disabled, are in the military, a foreign service member, an employee of the intelligence community or a member of the Peace Corps. Additionally if there are unforeseen circumstances (such as death or divorce) you may be able to qualify for a reduced exclusion.
The IRS takes about 1 page to define your main home. In short it is the house you call home – basically where you live most of the year, have the family gatherings (for holidays or other special occasions) and family picture albums (real pictures in a book, not images on an Internet site – do they still make those picture corners that paste in the album that keep the pictures from falling off the page?). Your main home is not the residence in Florida that you occupy for the winter months where everyone knows you as a “snow bird.” Other factors that help determine your main home are where you work, where your church or temple is located, where your bills are sent, where your car is registered, where you are registered to vote, etc. These are also factors that determine in which state you are a resident for state tax purposes – but that is a topic for another article.
The gain or loss on the sale is measured by the difference between the amount realized and your adjusted basis. The amount realized is the sale price reduced by the expenses of the sale, such as legal fees, real estate broker commissions, etc. Your adjusted basis is usually your cost to purchase your home increased by closing costs and improvements or additions to your home. If you received your home by inheritance, gift, or as a result of divorce, then the computation of adjusted basis gets more complicated. If you provide seller financing and have an installment sale, you can report the non-excluded gain as you receive payments from the buyer.
If part of your home is used for business - such as a home office or if you rented part of your house to others (a two family house) - the calculation of the gain and the exclusion is more complex. You have to separate the business portion of the gain when calculating the gain and the exclusion.
If you have any questions IRS Publication 523 www.irs.gov/pub/irs-pdf/p523.pdf is a good source of information. Of course you should always consult your tax advisor.
Gary Topple, CPA has more than 33 years of tax, accounting and auditing experience. He is a partner in the CPA firm G. R. Reid Associates, LLP.
gtopple@grrcpas.com
181 Main Street Huntington, NY 11743
631-425-1800 extension 306
Fax 631-425-4656
The information contained herein is intended to afford general guidelines on matters of taxation. Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Unless specifically stated otherwise, the written advice in this article or its attachments is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Readers are encouraged to consult directly with their professional advisors or a professional advisor at G.R. Reid Associates, LLP for advice concerning specific matters
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