Hopefully, your home has appreciated in value since you bought it, and you will realize a gain on the sale. Homeowners may exclude up to $250,000 in gain from the sale of a principal residence ($500,000 for married taxpayers filing a joint return). The exclusion may not be used more frequently than once every two years. As a general rule, to take the exclusion, the ownership and use test must be met.
First, you will need to determine the gain. Then, examine the rules for exclusion of gain.
In the case of employer-related relocations, some of your moving expenses may also qualify as tax deductions only if you are a member of the military.
If you sell your house at a loss, Uncle Sam considers this a personal loss and doesn't allow you to deduct it.
SUGGESTION: If you have an older mortgage and are assessed prepayment penalties when you surrender the mortgage, try to have them waived since this is no longer standard industry practice. If you fail, the charges are tax-deductible as mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.
Determining the Gain
When planning for your tax bill, first determine how much of a gain you will realize, starting with the basis of your home.
SUGGESTION: If you are certain that your profit on the sale of your principal residence will not exceed the exclusion amount ($250,000 or $500,000 for married taxpayers filing a joint return), and you qualify for the exclusion, you don't need to calculate the basis of your home.
First determine the basis of the home you're selling. Take the original purchase price and add to it:
IMPORTANT NOTE: Consult your tax professional if you received your home as a gift, as an inheritance, or in an exchange.
Little Things Mean a Lot
Most folks know that major improvements add basis, but frequently they overlook the small stuff:
and anything else that is attached to the home or property.
IMPORTANT NOTE: If you ever used a portion of your home as a home office, don't forget to reduce your basis by the amount of depreciation taken on the office in prior years.
Second, determine the adjusted selling price of the home:
Your gain is the difference between the adjusted sales price and the basis. For example, if your adjusted sales price is $250,000 and your basis is $75,000, you have a gain of $175,000.
Exclusion of Gain for a Personal Residence
Homeowners may exclude up to $250,000 in gain from the sale of a principal residence ($500,000 for married taxpayers filing a joint return). The taxpayer must have owned and used the residence for at least two of the five years ending on the date of the sale or exchange.
SUGGESTION: The exclusion is allowed each time a taxpayer who sells or exchanges a principal residence meets the eligibility requirements, but generally not more than once every two years.
IMPORTANT NOTE: The gain attributable to a home office or the rental portion of a multi-family home is not eligible for the exclusion. The gain attributable to depreciation is taxed at a maximum rate of 25%.
Some other rules that may apply to your situation are as follows:
If a taxpayer fails to meet the two-year requirement due to a change in the place of employment, health or other unforeseen circumstances, the taxpayer may be entitled to a pro-rata amount of the exclusion that would have been available had the ownership and use requirements been met.
Joe and Helen acquired their home in 1989 and sold it on March 1, 2009 for $300,000 (net of closing costs). They paid $50,000 for the home and put $28,000 worth of improvements into it. So their tax basis was $78,000.
Selling Price of Home Bought in 1989
Adjusted Basis of Home Sold
As you can see, the rules eliminate a taxable gain for many homeowners when selling a home.
IMPORTANT NOTE: This special rule is only a federal exclusion. You may still owe state taxes. Consult with your tax professional as to the state tax consequences.
If you're moving as part of an employer-related relocation, qualified, unreimbursed moving expenses in connection with your employment-related move may be tax-deductible including if you are a member of the military.