The information provided below is designed to help you figure your possible tax breaks. It is a quick look at homeowner expenses you may be able to deduct, expenses that are normally not acceptable deductions, and some tax tips. Since all homeowners have different tax situations, it is advisable to work with a financial adviser or the IRS to get the most from owning your own property.
Homeowners and buyers already know the many tax advantages that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, there is also good tax news for home sellers. When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.
The means most people will not have a tax obligation unless the gain from selling the home is very large. Most sellers are aware of this tax break, but if you’ve been in your home for a while you may not be familiar with how it works. The Taxpayer Relief Act became law in 1997. This law eased the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-
For those who may have been unfamiliar with the new Act and used pre-1997 rules for residential sales, don't worry. You are still able to claim the claiming the exclusion on your residential sales. The law change applies to all sales since it took effect.
Another bonus of the new rules: You don't have to buy another home with your sale proceeds. You can use the money any way you wish. You can invest it, travel to Europe in style, buy an RV and drive around the country or make another dream come true.
In most cases there is no limit on the number of times you can use the home-sale exemption. That means, no matter how many times you sell your home you are entitled to the deduction if the property you're selling is your principal residence. That means you live in it. This tax break does not apply to a house or other property that you have solely for investment purposes. In these cases, the capital gain rules apply.
The IRS considers a home a primary residence when you have lived in it for two out of the five years before the sale. The two years do not have to be sequential; the IRS lets you aggregate your time living in the house to meet the two-year residency requirement. This means your rental house can become your primary residence, making the sale of it eligible for the exclusion if you meet the IRS use and ownership test.
Finally, while technically there's no limit on the number of homes you can sell and reap tax-free gain, each sale must be at least two years apart. That means you can sell your residence this year, pocket your gain within the tax limits and buy a new residence every two years.
If you sell before meeting the ownership and residency requirements, you owe tax on any profit. The IRS provides some tax relief if the sale is because of a change in the owner's health, employment or unforeseen circumstances. In these cases, the tax-free gain amount is prorated.
And a ruling by the IRS in late 2002 could put more dollars in homeowners' pockets when they must sell before they qualify for the full tax break. The Treasury has defined the unforeseen circumstances that often force homeowners to sell and under which they now can get some tax relief. They include:
- Death
- Divorce or legal separation
- Job loss that qualifies for unemployment compensation
- Employment changes that make it difficult for the homeowner to meet mortgage and basic living expenses
- Multiple births from the same pregnancy.
A partial exclusion can be claimed if the sale was prompted by residential damage from a natural or man-made disaster or the property was "involuntarily converted," for example, taken by a local government under eminent domain law.
You are also able to reduce your taxable capital gain by the amount of your selling costs when you sell your home. Real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees are all considered selling costs. In addition, the IRS recognizes that costs ordinarily attributed to decorating or repairs -- painting, wallpapering, planting flowers, maintenance, and the like -- are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.
All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.
When you contact me at casey@margenau.com or call me at (703) 827-5777, I will be glad to discuss your Northern Virginia home buying investment with you and refer you to a qualified financial adviser, if necessary.
