Residential Real Estate Tax Tips

Homeownership is a wonderful and rewarding experience for many and it can be a great investment.

See also Real Estate

However, life situations often change and the need to move on and sell your home can arise. Perhaps it’s the desire for a larger home with more land, or maybe it’s the need for less space and to downsize, a new job out of state, or for a multitude of other situations. No matter the reason, it’s important to be aware of the impact selling a home can have on your individual tax situation.  To help clients, prospects and other understand the tax aspects of a home sale; Hanson & Company has provided a list of important tax tips below.

  • Capital Gains Exclusion - If you make a profit when selling – also called a “capital gain” – it can often be excluded from your taxes, but you must pass both the ownership and use test. The ownership test requires that the home has been owned by the seller for a period of at least two years. The use test requires that the home has served as the main residence for a period of no less than two years as well
    • Capital Gains Deduction – If a gain from the sale of the main home occurs, most taxpayers are able to exclude up to $250,000 of it from reportable income ($500,000 on a joint return in most cases). Remember, that if all the gain can be excluded there is no need to report the sale. If the gain cannot be excluded then it will be taxed and needs to be reported in IRS Form 1040.
    • Loss – Unfortunately, many taxpayers are disappointed to discover that incurring a loss on the sale of a home is not reported to the IRS. This means the loss on the transactions can be used as an income deduction.
  • Selling More Than One Home - If a taxpayer has more than one home, any gain realized can only be excluded from the sale of the primary resident. If there is a gain (and there generally is) on the sale of other real estate then the gains must be reported and taxes paid. Coincidentally, if a taxpayer owns two homes and lives in both of them, the main home is classified as the only where the taxpayer spends the most time
  • Business Use or Rental of Home -A taxpayer may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the above ownership and use tests. Below is an example to help you determine this.

Example:

  • On May 30, 1997, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and placed it on the market to be rented. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Five Year Period

  • Used as Home: 2/1/98-5/31/99 - 16 months
  • Used as Rental: 6/1/99-3/31/01 - 22 months
  • Used as Home: 4/1/01-1/31/03 - 22 months

Total Used as Home: 38 months

Total Used as Rental: 22 months

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.

Contact Us

Depending on the specific financial situation the sale of residential real estate can either be a painless tax process or present new and unexpected challenges. If you are considering selling your primary or secondary residence and believe there may be tax concerns, contact us today. We want to help! To learn more about real estate property taxes, contact us at (303) 388-1010, or click here to contact us.

Real Estate, TaxMarc Bradac