Selling a home can be a big deal. You have lived in this house and know it as your home for a certain amount of time. Sometimes you are just there for a few years and others you could have been there for even longer, watching your children grow up and living and loving in the same location for a long time.
There are many different reasons that you may choose to sell your home finally, including having to move for a job, downsizing, or just finding another one that you like better and can now afford. But figuring out how to deal with the income you make on your home during tax time can sometimes pose a challenge.
If you have never sold a home before and are interested in learning the best ways to deal with the tax income that you will receive from the sale, make sure to bring the professionals to help out. Your tax professional will be able to discuss how the sale of your home is going to influence your taxes and some of the things that you can do in order to reduce your tax bill at the end of the year.
Reporting Home Sale as Income
In most cases, if you sell your home, you are going to make a profit out of that sale. This money is considered income when it comes time to do your tax return. While most people assume this would not be income, you do need to report it on your tax return or you could be in some trouble. This is true whether you lived in the home as a primary residence, flipped the home, or used it as a rental property to make some money.
If you made any profit off of your home, you will need to talk to a tax professional about your tax requirements with this sale. They will be able to walk you through the process so you get the help that you need and to help reduce your tax bill at the end of the year.
On the reverse side, if you sold your home for a loss during the tax year, you will be able to claim this loss on your tax return. This could help you to recover some of the money that you lost in this process and will make it easier on those who had to sell their homes under the value for some reason.
Exceptions to These Rules
There are some exceptions to the rules listed above. Not everyone will have to report the sale of their home as income on their tax return. The first exception is if the home profit was less than $250,000 total for an individual. This is not the price that you sold the home at, but the profit that you made from the home after paying fees, the real estate agent, and your past mortgage. The amount goes up to $500,000 if you are married and filing your tax return jointly. If the sale of your home goes above these amounts, you will have to pay income taxes on the amount that you made over them.
Also, you must live in the home for a certain amount of time before you can get the exceptions. This is to prevent those who own rental properties or who are flipping homes from getting the income tax exemption. In most cases, if you lived in the house for a total of 2 years out of the past 5, you will be able to get the exemptions that were listed above. If you rented out the home or just bought it to flip a few months later, you will have to claim this as income on your tax return.
There are a few exceptions to the time limit of living in the home. For example, if you purchased a home and then need to relocate because of your job 18 months later, you may still be able to get this income exemption when it comes to tax time. You will need to prove the reason for the sale of the home and prove that you were not doing it just to make a profit, but this should be pretty easy to complete so you can save money during tax time.
Getting Professional Help
It is a good idea to talk to your tax professional before going through with the sale of your home. Dealing with this on your own can lead to issues and misunderstanding. A tax professional can look over your unique situation and will discuss how much you can sell the home for before having to report as income and the best steps to preventing a huge increase in your taxable income at the end of the year. Don’t try to do this on your own, trust a professional to help you get through the process and to understand what is going on with your home sale today.
Dealing with the various tax issues that come up through the year is never easy. The tax laws often change and what worked in previous years won’t always work in this year. Make sure to have the right tax professional on your side from the very beginning to ensure that your taxes are taken care of and done the right way. Contact our offices today to get started.
Simon Hase, CPA