The process of buying or selling a home is often mind-boggling. Misinformation about the tax implications of real estate sales abound and it is easy to get overwhelmed by these complex transactions.
Whether a seller is responsible for paying taxes on the sale of a home and the amount of those taxes depends on how long they’ve lived in the home. In many cases, homeowners can pocket up to $250,000, or $500,000 if filing jointly with a spouse, tax-free. The IRS has specific guidelines outlining this exemption and exactly who qualifies.
Exclusion of Taxes for Real Estate Transactions
For those homeowners receiving larger amounts from the sale of their main home may qualify to exclude up to $250,000 of that gain from their income when filing their tax return. This can be extended up to $500,000 when the return is filed jointly with a spouse.
To qualify for this tax break, homeowners must meet both the ownership test and the use test, which is determined by the IRS. This means that eligibility requires that a homeowner has used a home as their main home for at least two of the five years leading up to its date of sale. The ownership and use test can be based on different two-year periods; however, both of the tests must be met during the five-year period ending on the date of the sale.
Exceptions to the Exclusion
For those selling properties such as vacation homes, investment homes or rental properties, these exclusions generally do not apply. These transactions are typically subject to taxes on the entire income gained in the sale.
Homeowners who have sold another home within the five-year period, and were eligible for the exclusion, will generally not be eligible for a second exclusion. The IRS requires that the sale of a home be reported on a tax return, even if it is excluded. Sales with a gain over $250,000 (or $500,000 for a married couple) are subject to capital gains tax.
Certain special situations allow homeowners to suspend the five-year test period. For example, some active duty military personnel and their spouses may elect to extend the period up to 10 years.
The Benefits of Working with a Financial Professional
The tax implications of a real estate transaction can be complex. This is why many homeowners trust the counsel of a reliable professional when selling their homes. Relying on the expertise of an experienced financial professional will help you to make wise decisions regarding the sale of your home.
At Ernst Wintter & Associates we understand the financial intricacies of selling your property. We will be with you each step of the way to help you understand the process and the scope of any tax ramifications. Learn more by contacting our accounting experts today.