This week, Gail answers questions about the tax implications of the sale of a home.
I am 52 years old. I recently closed on a new house. My former residence is for sale. I expect to walk away from closing with about $30,000. What are the tax implications here?
It's great to have good news to deliver: there are probably NO tax consequences!
You do not even have to use your entire profit from the sale of your home to buy another one. That provision was eliminated when the tax code was changed several years ago.
Under current regulations an individual is allowed to walk away with as much as a $250,000 profit (selling price minus cost basis) on the sale of a primary residence and not owe a dime in taxes. A couple can can earn twice that -- $500,000 -- without any tax consequences.
And you can do this repeatedly provided you follow a few basic guidelines. To qualify for the tax exclusion: 1) you must have been the owner of the home, and 2) you must have lived in it as your principal residence for at least two out of the past 5 years.
Imagine: if you don't mind dealing with the paint and plaster dust, every two years you could conceivably buy a fixer-upper house that you live in while repairs are being done. When you sell it -- hopefully for more than you paid for it plus the upgrades -- you walk away with a tidy, tax-free profit.
If your profit exceeds the amounts above, then you will pay long-term capital gains tax on the excess. But what if you haven't lived in this home for two out of the past five years? In that case, you might -- might -- owe tax on your entire profit.
Even under these circumstance, however, you've got some "wiggle" room. If you had to sell your home because of a job change (see the next question), or a health condition (for instance, you had an accident and can no longer climb the stairs) or "unforeseen circumstances" (examples would be the Sept. 11 terrorist attacks, the death of a spouse, or a man-made disaster) you might qualify for a tax waiver on a portion of the profit.
Say you lived in the home for one year instead of two -- in other words, half the required time. In that case, 50% of the gain on your home would not be taxable. If it was your primary residence for 18 instead of 24 months, you could exclude 75% of the gain. But keep in mind, this is only the case if one of the conditions in the previous paragraph also applies. For more information, check out IRS publication 523. You can order it by phone or download it at www.irs.gov. Whether you think you owe capital gains tax on the profit you make or not, you have to report the sale of your home on Schedule D and file this along with your regular income tax papers.
By the way, if you end up with a loss on your home, that is, you sell it for less than what you paid for it plus all the improvements you put into it over the years, you cannot deduct the loss -- it is considered personal property and not deductible.
Hope this helps,
Dear Gail Buckner,
Do you know of any tax deductions I'm entitled to from the sale of my home due to a job loss (corporate layoff due to plant closing)? My wish is to write off some or all of the closing costs on my end.
I'm sorry to hear about the loss of your job. It's even more traumatic when you have to uproot the family and move.
Closing costs are never deductible. Actually, the term "closing costs" includes a number of different expenses related to the sale of property. These would be such things as real estate commissions, real estate transfer taxes, and document preparation fees. While you cannot deduct any of these expenses to reduce your taxable income, they can be used to reduce the profit -- or "gain" -- you report on the sale of your home.
Is the profit you made on the sale of your home taxable? Not if you lived in it for at least two out of the past five years (see above). End of story.
However, if you don't meet the "two-out-of-five" criteria, then you have to determine if you qualify for one of the exceptions. In your case, it sounds as if you might qualify for a partial exclusion because of a "job change". Unfortunately, it's not that simple.
Dave Binder, a CPA in Mars, Pa., says the IRS looks at how far your new job is from your OLD -- as in your "former" -- home. The bottom line is this: measured from where you used to live, your new place of employment has to be at least 50 miles further than you drove to your old job. If it is, then part of the gain from the sale of your home will not be taxable.
This distance test is critical. If you meet it, you can also deduct any moving expenses incurred; fail the distance test and "zero" moving expenses are deductible.
By the way, "moving expenses" only include the cost of transporting: 1) your household possessions; 2) yourself; and 3) your family to your new location. Period. (Naturally, if your new employer picked up any of these costs, then you are not eligible to take them as a deduction.)
Any meals you buy on the way to moving to your new home are not deductible. Neither are "house-hunting" expenses. I hope your new job and new neighborhood work out for the best.
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