Are you planning to sell your humble abode but are confused and short of time to understand the tax regulations? What if we told you that you might not have to pay any tax for the sale of your residence? Well, that certainly brighten things up, doesn’t it?
Well, first things first, being updated with all the latest tax regulations can save you a lot of tax money, especially when it comes to selling your place of residence. Tax on the sale of a residence is a bit different from the income tax you pay on your salary.
You may exclude from your income all or part of the gain received by you on selling your home if you qualify the Ownership and the Use Tests. Ownership test requires you to own your residence and the Use test requires you to have lived in that residence, in both cases, for a minimum period of two years in a five-year period, preceding the date of sale of your home. If you qualify these tests, then you can go ahead and claim the exclusion of any gains made by you on such a sale.
Have more than one home?
If you, however, have more than one residence then you may claim the above exclusion of tax only in the case of sale of your main residence. The main residence is defined as the one in which you have stayed for the most amount of time, and have been the owner of the house for a minimum of five years. You, of course, need to pass the Ownership and the Use test to avail such an exclusion.
For example, if you have two houses, one in the main city where you are mostly put up and a farmhouse in the outskirts of the city where you visit a few times in the year or have rented it out. In this case, your main home will be the one in the main city and you can claim tax exclusion on the sale of your this house only. In case, you plan on selling the farmhouse, then you will have to pay the taxes as per the tax regulations of the IRS.
Can you benefit from the exclusion more than ones?
Yes, you can! The only condition is that you will need to qualify the Ownership and the Use Test again and there should be a minimum of two years of difference in the current exclusion claim and the last one.
Need help with calculating the financials?
Easy! Just go with the flow of the Publication 523 (Selling your Home) and you will get a clear picture of all the financials. You will find the worksheets for calculating any gain or loss on the sale of your residence in this publication which will help you figure out the adjusted basis of the home you sold, any gains or losses on such sale, or the gain that you can exclude from your income while paying income tax.
Know the threshold for excluding gains from your income tax?
$250,000 is the profit threshold up to which you may be able to exclude the gains made on the sale of your main home and $500,000 in case you are married or file for a joint return. If you can exclude all the gains made by you then you need not report such gains on your tax return.
But what if you don’t qualify the Ownership or the Use Test?
What if things go south and you don’t qualify the ownership or the use test or have gains from the sale that cannot be excluded? In such cases, your gains are taxable and you will need to report them by filling the Form 1040 which can be found in Schedule D.
In what cases should you report the gains made on the sale?
Well, the headline clearly signifies that you are not bound to report the gain or loss made on the sale of your humble abode except in a few cases.
- If you have made a gain which cannot be excluded from your income. (Failed ownership or use test or in case of sale of residence apart from the main one)
- If you have made a gain and choose not to exclude it (Though no one likes not being given benefits by the state, there are some individuals who would choose not to take it as another one of their residences might have a better sale prospect)
- If you have made a loss and received the Form 1099-s
Healthy tax planning can do great wonders to your bank account and it’s important to keep in mind that not every income is taxable.. If you would like to know more about the special circumstances under which you can get the exclusion even if you don’t qualify the necessary conditions or you are green card holder residing in a foreign country and want to sell off your residence, please feel free to contact us and our experts will assist you to make best financial decisions which will help you save on tax.
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