With the housing market as hot as it’s been, you may be thinking of selling a home, and hopefully taking the profit and running. But will you owe any taxes to Uncle Sam? The short answer is, it depends (hey, nothing’s ever straightforward when it comes to taxes!) This article will discuss various aspects of home sales and taxes.
Principal Residence?
If the home being sold is your principal residence, up to $500K of gain on the sale can be excluded from tax on a married joint return ($250K for a single taxpayer). Note that this is gain on the sale, which is generally the difference between the selling price and the cost basis of the home. Also remember that this is for the place that you call home, normally your primary residence, and not a second or vacation home. The exclusion can be claimed if you’ve lived in this residence for at least two of the previous five years. If you don’t meet the two year requirement due to certain specific unforeseen circumstances, a reduced exclusion can be available.
Rental Property?
Do you live in a home that’s also partially rented out to somebody else? If you do, the two parts (residence and rental) need to be split into two transactions for tax purposes, and only the residence part is subject to the gain exclusion. Any gain on the rental portion will be 100% taxable.
3.8% Medicare Tax
For tax years starting in 2013, there’s a 3.8% Medicare tax on “net investment income”, and I’ll give you one guess what gets included in this computation. The good news is that if the principal residence exclusion amount wipes out your gain on sale, you won’t be subject to the 3.8% tax either.
Sale of Principal Residence at a Loss
Sorry, this one just isn’t deductible, period, end of story. The story has a different ending if it’s a property you rented out to others, but that’s beyond the immediate scope of this article.
Home Office Depreciation
If you took depreciation deductions on a home office, this will reduce the basis of your home, for purposes of computing the gain on sale. Not only that, but the amount of depreciation taken in previous tax years will be recaptured on sale as taxable income, and also be subject to the 3.8% Medicare tax.
Obviously there are lots of non-tax related things to think about when selling a home (moving, for one), but don’t lose sight of the tax laws surrounding the sale, because if you do, you may have a nasty surprise come tax time. My recommendation is to speak with your favorite CPA (hint hint) and do some pre-sale tax planning.
Please forward this article to anybody you know who is considering selling a home, and if you have any personal stories or comments about home sales and taxes, please leave a comment.
Jay E. Reiner, CPA 