Usually, the profits your clients earn are taxable. However, if a taxpayer sells their home, they may not have to pay taxes on the money they gain. So we’ve got some tips for taxpayers who are contemplating – or completing – a home sale in 2016.
Exclusion of Gain – A taxpayer may be able to exclude all or part of the gain from the sale of their home, provided they meet the eligibility test. Parts of the test involve ownership and use of the home. The taxpayer must have owned and used the house as their main home for at least two out of the five years before the date of sale.
Exceptions May Apply – As in a lot of things in life, there are exceptions to the exclusion rules. One such exception applies to taxpayers with disabilities. Another applies to certain members of the U.S. military and includes some government workers and Peace Corps members. For more details, see IRS Publication 523, Selling Your Home.
Exclusion Limit – The most gain that a taxpayer can exclude from tax is $250,000 – that’s $500,000 if filing jointly. The Net Investment Income Tax won’t apply to the excluded gain.
No Gain, No Tax, No Worries – If the gain on the sale of the home isn’t taxable, there’s no need to report the sale to the IRS on the tax return.
When to Report the Sale – The sale must be reported on a tax return if the taxpayer can’t exclude all or part of the gain. The sale must be reported if the taxpayer chooses not to claim the exclusion, or if the taxpayer receives a Form 1099-S, Proceeds from Real Estate Transactions. Reporting a sale? Check out the Questions & Answers on the Net Investment Income Tax on IRS.gov.
When to Exclude – Generally, gain from the sale of a home may be excluded only once every two years. Of course, exclusions apply.
Only a Main Home Qualifies – If the taxpayer owns more than one home, only the gain on the sale of their main home qualifies. The main home is the home the taxpayer lives in most of the time.
Special Rules Apply – if the taxpayer claimed the First Time Homebuyer Credit in buying the home, special rules apply to the sale. This is another case to check Publication 523.
No Gain, No Deduction – If the home was sold at a loss, the taxpayer cannot claim a deduction for the loss.
After the taxpayer sells the home and moves, update their address with the IRS. To do this, file Form 8822, Change of Address. Mail it to the address listed on the form’s instructions. If the taxpayer purchased health insurance through the Health Insurance Marketplace, the Marketplace should also be notified when the taxpayer moves out of the area covered by their current Marketplace plan.