For everyone, our homes are our most valuable asset. We may encounter instances where we decide to sell our homes for various reasons. It could be for relocation, home improvement, or financial assistance.
Some substantial tax considerations affect your net income after selling your home. If you are considering selling your home, read this article to understand the tax regulations that will apply to you.
Previously, sellers may postpone the capital gain taxes on all past gains. The gain of any amount is eligible for this delay as long as they meet the two conditions outlined below.
- The cost of a replacement home was more for the seller than for the one sold.
- The seller bought the replacement two years before or after the sale date.
Per current rules, you don’t have to find a replacement for your home. You can buy a less expensive home or return to renting after removing the limit. Even better, you are allowed to use the exception by the IRS each time you sell your main house.
There are two requirements to qualify under the current deferral rules:
- At least twice in the last five years, you must have owned the home and called it your principal residence. These two years do not have to follow one another.
- During the previous two years, you must not have used the limitation.
- The home selling would not be eligible for any of the exclusions if you bought the property through a similar exchange within the last five years.
- Only one spouse of a married pair needs to meet this criterion.
- You must pass the residency exam to determine if the house counts as your primary residence.
- You must have resided in the house for 24 months in the previous 60 months.
- The sale or transfer of ownership as part of a divorce settlement or separation.
- Sale owing to the death of a spouse while the house was owned.
- With unoccupied land for sale.
- Residents whose former residence was demolished or condemned.
- Taxpayers who served in the military during the time the home was owned.
You could defer all or a portion of the earnings from the sale of your house if you are eligible for a capital gains exclusion. To qualify, you must also meet other IRS requirements and have resided in your home at least for two out of the preceding five years.
You can do a few things to enhance your cost base, which can help you reduce your tax liability. Simply review your cost record and see if you have any of the following items you can include.
1. Closing costs when purchasing a home.
2. Home remodeling costs include a new roof or room addition.
3. Real estate taxes owed by the seller but paid by you and not repaid.
Another thing you can do for tax reduction: A 1031 exchange could result in tax savings if your property does not qualify for the capital gain exclusion because it was not your primary residence.
Selling a home is a life-changing experience for everyone because it affects your money and may result in a tax liability. There are still several methods to take advantage of tax exclusions, deferrals, or exemptions when you sell your home, no matter if standards for capital gains recognition have changed.