What is the Home Sale Gain Exclusion?

The home sale gain exclusion is often considered one of the most valuable deductions you can use when you sell your home. This goes along with the many other tax deductions and credits you can claim as a homeowner. But what is it? And how can you take advantage of it? Richard Rodgers is a tax professional in El Cajon, California, and he can help you take advantage of this extremely lucrative tax deduction. If you have sold your home in the past year, it is definitely worth looking into!

What are Home Sale Gains?

Your home is just like any other asset that you own. When you sell it, you must claim the gain from the sale as taxable income. This general rule applies to every other asset that you own, including vehicles, stocks, and even furniture. Unlike these other items however, you may not have to claim the entire gain on your home as income in some circumstances.

The Home Sale Gain Exclusion

The home sale of an exclusion allows you to exclude up to $250,000 in gains from your income. If you’re married, you can exclude up to $500,000 in gains. In order to do this, you must meet two tests.

• The Ownership test: You must have owned your home for at least two years out of the five years before the sale
• The Use  test: You must use the home as your main home for at least two years out of the five years before the sale. This means that this deduction does not apply to real state that you hold for investment purposes. Regular gain rules still apply to these properties—just like you are selling a stock. The use test also limits your ability to take this exclusion on second homes or vacation homes.

You can meet these tests during two different two year periods, as long as they both occurred in the five years prior to the sale. You may not be able to claim the exclusion if you used it on another home in the prior two years.

These tests may not apply for certain military members are spouses and military members. Military members may be able to extend the five-year period to 10 years.

Without this exclusion, homeowners would have to pay taxes every time they sold their home, which might limit home sales significantly.

Reporting the Sale on Your Tax Return

If you have received form 1099-S, then you must report the sale of your home. Your real estate agent will provide this form, if he or she thinks that you need it. This form, the proceeds from real estate transactions form, should be used to report your gain even if it is excludable. You will use form 1040, schedule D and form 8949 to report the sale of your home. Different rules may apply if you have sold your home on contract.

If you did not receive a form 1099-S, then there is no need to report the sale of your home on your tax return. You can avoid getting this form by letting your agent know that the sale will be tax free for you. This involves proving that you meet the tests as described above. You should also show that no part of the residence was used for business rental purposes. You may also need to show that the sale price or gain was below a certain level. Generally, you should prove this by February 15 of the year after the sale.

How Do I know How Much the Gain on My Home Is?

When you’re figuring gain, usually you can take the buying price from the sale price to find the total gain. For a home, however, the math gets a little bit more complicated. This is because you need to find the adjusted basis for the calculation.

The adjusted basis is the total amount of money that you have invested in the home, including the buying price and any updates or additions you may have added to the house. This does not include routine maintenance such as painting, but if you added a new air conditioner or remodeled your kitchen, then those would affect your basis.

It is easy to see how this calculation could become very complicated. A tax professional can walk you through this calculation can help you determine the gain on your home. Hopefully, you will not have to pay any taxes when you sell your house. Richard Rodgers is a tax preparer in California who can help you figure your gain or loss on your home. Use the contact button below to get started or click on the profile link to find out more about Richard Rodgers.