Selling a Home Can Have Hidden Tax Implications: 5 things homeowners need to know
The good news is, the housing market is booming in Southeast Texas. Summer is always a busy time for buying and selling residential property. The bad news is, many homeowners don’t realize how selling their home can affect their taxes. It’s essential to know the tax implications before placing a house on the market.
Dianne Ketcham, owner and manager of Liberty Tax Service in Spring, offers this list of things everyone needs to know if they are considering selling their home.
1. Income from selling your home may be tax free – “If you have lived in your home for two out of the last five years, you can exclude $250,000 in gain,” Ketcham said, “$500,000 if you’re married and filing jointly.” In special circumstances, sellers may exclude all or part of the gain from a house sale, even for those who do not meet the residency requirement.
2. You don’t have to reinvest the sale price into a new home – “Many people remember the time when you could only defer the profit from a sale if you then used that money to buy a new home,” Ketcham said. “That all changed in May 1997.”
3. If you lose money on the sale, you cannot write off the loss – “If the house was your residence or a second home,” Ketcham said, “the IRS considers it a personal loss and you can’t write it off on your taxes.”
4. There are no exclusions for vacation homes or second homes – Ketcham said, “You must pay taxes on the gain on the sale of a second or vacation home; no exclusions exist.”
5. For rental property, all gains or losses must be reported – “If you sell a house that was used as a rental, any loss will be deductible,” Ketcham said, “but any gain is also taxable.” The same applies to a home office. “With a home office or rental home, you must deduct the depreciation taken from the cost, which will increase the gain,” Ketcham said.
For anyone selling a home, the first step in all cases is to calculate the expected gain or loss, prior to the sale. “This has nothing to do with the cash out of the sale,” Ketcham said, “but the comparison of your basis or cost of the house to the current sales price.” Ketcham advises homeowners to take the original purchase price of their home and add all closing costs and improvements made to the house. “This constitutes your basis,” Ketcham said. “You then subtract that from your sales price, less the selling expenses and realtor fees to determine the gain or loss from the sale.”
For assistance, the professionals at Liberty Tax Service are available year-round at 440 Rayford Road, Spring, (832-447-1800). “You can always schedule an appointment to discuss any issues you may have,” Ketcham said. Visit www.libertytax.com for more information.