Home For Sale: Reporting Gains and Losses
May Is Hot Month For Home Sales
Zillow reports that the hottest time of year to sell a home is May 1 – May 15. Homes sold during this period typically sell six days quicker and for $1,600 more than average listings during other times.
If you were one of the lucky ones or maybe you are considering selling your home in the near future, you may be in for more good news when filing your taxes. You may qualify to exclude all or part of any gain from the sale from your income. Here are some things homeowners should think about when selling a home:
Ownership and Use
To claim the exclusion, you must meet ownership and use tests. During a five-year period ending on the date of the sale, you (the homeowner) must have owned the home and lived in it as your primary residence for at least two years.
In addition, you are generally not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
Gains
If you have sold your primary home and have a gain from the sale, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return with your spouse, you may be able to exclude up to $500,000.
Homeowners excluding all the gain do not need to report the sale on their tax return.
Losses
However, if you experience a loss because your primary home sold for less than what you paid for it, this loss is not deductible.
In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase.
Your basis in some assets is not determined by the cost to you. If you acquire property other than through a purchase (such as a gift or an inheritance), refer to Publication 551, Basis of Assets, for more information.
If you acquired your property from an individual who died in 2010, special rules may apply to your calculation of basis. Review Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for more information.
Before figuring gain or loss on a sale, you must determine your adjusted basis in that property. Certain events that occur during the period of your ownership may increase or decrease your basis, resulting in an “adjusted basis.” Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as allowable depreciation and insurance reimbursements for casualty and theft losses.
Multiple Homes
If you own more than one home, you can only exclude the gain on the sale of your main home. You must pay taxes on the gain from selling any other home.
Reported Sale
If you do not qualify to exclude all of the taxable gain from your income, you must report the gain from the sale of your home when you file your tax return. If you choose not to claim the exclusion, you must report the taxable gain on your tax return.
If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable.
Mortgage Debt
Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after December 31, 2017, cannot exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.
Installment Sales
If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available.
Possible Exceptions
There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community, and Peace Corps workers.
Worksheets
People who wish to figure the adjusted basis of the home sold, the gain or loss on the sale, and the excluded gain on the sale can find a worksheet inside Publication 523 on IRS.gov.