19 Sep 2022 Taxes When Selling Your Home
Authored by Haynie & Company Partner Bernard Abercrombie, CPA.
As you are aware, the real estate market has been on quite a ride over the last year or so. Market data seems to indicate that the frenzy is scaling back significantly. Top properties are still not staying on the market long. However, generally, they aren’t moving as quickly as in the last year, but still may generate multiple offers. Many Sellers now have to reduce their prices to attract offers. In any event, the recent activity has generated a tremendous number of home sales, begging the question, how is that taxed?
It is not uncommon for a client to ask about the sale of their residence. Many still believe that if they spend more than they sold their former home for, there are no current tax consequences. That is the way it worked for many years but changed in 1997.
For this article, I will focus on married couples selling their homes and a few of the idiosyncrasies.
Capital Gains Tax
The rule today is that when you sell your principal residence, and if you meet certain qualifications, any gain up to $500,000 is excluded from taxation. There is no requirement to reinvest any portion of the proceeds of the sale into a new home. This exclusion requires that the couple must have owned the property and lived in the property for any two of the prior five years to be eligible for the exclusion. The residence test does not have to be consecutive, so partial occupancy during the five years still qualifies. Any gain above the $500,000 exclusion will result in a capital gains tax on the excess.
Sounds simple enough, doesn’t it? Well, now let’s throw a wrinkle or two in.
The ownership test does not require that both husband and wife owned the property together for the test to be met, only one spouse must meet the ownership requirement. So, a couple that gets married during the time frame can still qualify. However, the residency requirement does require that both spouses meet the two of five-year rule, so a recently married couple may fail this test and lose part of the exclusion.
Next, one might have sold two principal residences within two years and have met the exclusion requirements on both. The exclusion can only be used once every two years, so if taxpayers have claimed the exclusion within two years of the second sale, the second sale would not be eligible for the exclusion.
Additionally, even if the sale doesn’t meet the eligibility requirements, there are certain limited circumstances where a partial exclusion might be available, such as a Work-Related Move, a Health-Related Move, or certain Unforeseeable Events.
Finally, as always, it should be noted that other circumstances could eliminate, reduce, or increase a partial or eliminated exclusion that is beyond the scope of the article. Consult your tax advisor if you believe there are unusual circumstances.
We at Haynie & Company are happy to assist you with your tax planning and preparation.
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