Jun 01, 2019
By Paula Rogers, CPA President and Partner at Terry Lockridge & Dunn
I often get asked by clients, “How much do I have to spend on a replacement home to not pay any taxes on the gain from the sale of my home?” The answer is that this rule went away a long time ago. Taxpayers may qualify to exclude all or part of any gain from the sale of their home from income. Items to consider by homeowners when selling a home:
Ownership and use: To claim any exclusion from your income, taxpayers must meet the ownership and use tests. Taxpayers must have owned and lived in the home as their primary (main) residence for at least two years of the five-year period ending on the date of sale.
Exceptions: There are always possible exceptions to these rules and eligibility tests. Some of these exceptions, but not all, are: separation or divorce, death of a spouse or you were a service member during ownership of the home.
Gain exclusion amount: Single taxpayers who sell their home and have a gain may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. Taxpayers do not need to report the sale on their tax return if they are able to exclude all the gain unless they get a Form 1099-S. Taxpayers who do not qualify to exclude all of the taxable gain from their income must report any gain when they file their tax return.
Partial Exclusion of Gain: Taxpayers that do not meet the eligibility test, may still qualify for a partial exclusion of the gain. You can meet the partial exclusion if the main reason for the home sale was a change in workplace location, a health issue or an unforeseeable event. Unforeseeable events cover a wide range of circumstances.
Multiple home/vacation homes: Taxpayers do not qualify for this gain exclusion from the sale of their vacation home or other residences that are not their main home. Only the gain on the sale of a taxpayer’s principal residence is eligible. Generally, taxpayers are not eligible for the gain exclusion if they excluded the gain from the sale of another home during the two-year period prior to the sale of the home.
Losses: Losses incurred from the sale of your main home or vacation home are not deductible.
Other considerations: Property acquired through a like-kind (1031) exchange during the prior 5 years before sale is not eligible for the home exclusion. A home that was a rental property of the taxpayer’s prior to becoming their main home will have some special calculations to determine the amount of any exclusion as well as the taxable gain amount from depreciation as a rental property.
There are planning opportunities to possibly get that vacation home, as well as other properties, to be eligible for the gain exclusion. Contact Paula Rogers at firstname.lastname@example.org, or any of the tax professionals at Terry Lockridge & Dunn for any questions arising from the possible sale of your home and to minimize any tax consequences! They can be reached in Cedar Rapids at 319-364-2945 or in Iowa City at 319-339-4884.