Written by Tom Murtha on June 5, 2024 in Uncategorized

Selling Your Primary Residence: A Tax Guide

Selling a primary residence can be both exciting and overwhelming. To make informed decisions, it’s important to understand the tax implications. Here’s a comprehensive guide to help you navigate the tax aspects of selling your home.

Capital Gains Tax

Your gain is essentially the difference between the selling price and your home’s adjusted basis. The adjusted basis is the original purchase price, plus improvements, minus any depreciation claimed.

Capital Gains Tax Exclusion

A significant tax benefit of selling a primary residence is the capital gains tax exclusion. If you meet the criteria, you may exclude up to $500,000 of the gain from your income if you’re married and filing jointly, or up to $250,000 for all other filing statuses. Even if you qualify for the exclusion, you may still need to report the sale on your tax return. In addition to federal taxes, state taxes may also apply. 

To qualify for this exclusion, you must meet the following criteria:

  1. You must have owned the home for at least two out of the five years preceding the sale.
  2. You must have lived in the home as your primary residence for at least two out of the five years preceding the sale.
  3. You haven’t claimed the exclusion for another home sale in the past two years.

If you fail to meet the ownership and use conditions due to unforeseen circumstances, such as a job change or health issues, you may qualify for a reduced exclusion. The reduced exclusion is calculated based on the portion of the two years that you did meet the requirements.Periods during which the home was not used as your primary residence (e.g., rented out) are considered non-qualified use after 2008. This portion of the gain may not be eligible for exclusion.

Tips for Maximizing Tax Benefits

  1. Keep detailed records of your home’s purchase price, improvements, and any other adjustments to your basis.
  2. Keep the closing statement or ALTA statement and verify if you will receive a 1099-S. You’ll need to provide these documents to your accountant to prepare the return. 
  3. If possible, plan your sale to meet the eligibility criteria for the exclusion.
  4. Tax laws can be complex and subject to change. Consulting a tax professional can help ensure you maximize your benefits and comply with all regulations.

Conclusion

Selling your primary residence can have significant tax implications, but understanding the rules around capital gains tax exclusions can save you a substantial amount of money. By meeting the eligibility criteria and keeping meticulous records, you can take full advantage of these tax benefits and make the most of your home sale.

Leave Comment