Drive down almost any street in Greater Boston and across eastern New England and you are almost guaranteed to see “For Sale” signs sprouting like late summer weeds. The real estate market in our region is among the most active in the country, with eager buyers lining up to snap up a home inventory that is having a hard time keeping pace.
If you are one of the thousands of people who have decided that now is a good time to maximize your home investment by putting your home on the market, you should be alert to the tax implications of a home sale. This is particularly important if your selling price is significantly higher than the price you originally paid for your home, which is frequently the case.
Below are some basic tax tips to be aware of before you plant that “For Sale” sign in the front yard.
Ownership and Use Exclusion. Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home. To claim the exclusion, the homeowner must meet certain ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:
- Owned the home for at least two years
- Lived in the home as their main home for at least two years
If there is a gain from the sale of their main home, in most cases the homeowner may be able to exclude up to $250,000 of the gain from income (or $500,000 on a joint return). Homeowners who can exclude all of the gain do not need to report the sale on their tax return.
On the other hand, if you sell your main home at a loss (at a price lower than you paid to purchase it), the loss is not deductible.
Reporting a Sale. Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.
Possible Exceptions. There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community, and Peace Corps workers, among others. More information is available in Publication 523, “Selling Your Home.” The publication includes worksheets to help you figure the:
- Adjusted basis of the home sold
- Gain (or loss) on the sale
- Gain that may be excluded
Other things to keep in mind:
- Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must be paid on the gain from the sale of any other home.
- Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
- Work-related moving expenses might be deductible, see Publication 521, “Moving Expenses.”
- If you move after the sale of your home don’t forget to update your address with the IRS and the U.S. Postal Service by filing Form 8822, “Change of Address.”
- Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.
Selling a home is a lengthy and complex process, and the tax rules that apply to a home sale are no different. Be sure you contact an experienced and qualified tax consultant to advise you on the tax implications of a home sale. For more information on this and other tax topics, please call the Gray, Gray & Gray Tax Department at (781) 407-0300.