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tax tips for sellers

tax benefitsWith tax season upon us, many sellers have questions about what they will end up owning. While it is always important to consulate your tax professional to understand the tax implications, here are some tax tips for home sellers:

Make Sure You Don’t Owe Capital Gains Tax
The windfall you receive from real estate price appreciation is considered a capital gain, and may be taxable by the federal government. For example, if you bought a place at $150,000 and sold it for $225,000, your capital gain was $75,000.

But, don’t worry: if you’ve owned your home for at least two years and it’s been your primary residence for at least two of the past five years, you’re likely in the clear. The first $250,000 in capital gains is tax-exempt (and that goes up to the first $500,000 if you’re married and filing jointly). So for the average homeowner, capital gains tax is not a concern.

And, even if you haven’t lived in your home two years before selling, there are qualifying unforeseen circumstances (such as a divorce or job transfer) for which you would be able to waive the capital gains tax up to the above amounts.

That said, there are instances when this tax will be in play: If you made an extraordinarily good investment in your home choice, you’re selling a vacation home or you’re selling after owning for less than two years without a qualifying circumstance.

If You Owe Capital Gains Tax, Calculate Your Cost Basis
If you’re one of the few who needs to pay capital gains tax on a residential transaction, you can reduce the amount of reportable capital gain by properly calculating your cost basis. What does that mean? Well, your home likely cost more than just the initial purchase price – and that needs to be factored in when considering how much profit you earned.

Here’s one example of a significant cost basis increase: Let’s say you bought a $200,000 home on a large lot, with the intention of expanding it. After spending $180,000, you have a much larger, nicer home that appraises for far more than $200,000. When you go to sell, you need to remember that it cost you $380,000 to get to the home you ended up selling. (Be careful, however: you can generally only elevate your cost basis if you made significant changes to the home – not if you paid for basic maintenance and repair.)

Additionally, many of your selling costs (such as broker fees, certain closing costs and some cosmetic changes in preparation to sell) can be added to your cost basis, meaning they can also reduce the amount of your capital gain. To make sure you properly report your cost basis, consult a tax professional.

If You’re Moving for a Job, You Can Often Deduct Your Moving Expenses
While this isn’t specifically home related, many people put their home on the market to take a new job, or because they were transferred by their company. If your company does not pay for your move and the move is over 50 miles, you can deduct your moving expenses from your annual income. While this may seem like a minor perk, it will often save you hundreds of dollars come tax time.

If You Sold for Less Than You Owed in 2014, You Won’t Pay Any Home-Related Tax
It may seem strange but, before 2007, if you sold your home as a short sale and received debt forgiveness from your lender, the amount of the forgiveness was reportable to the IRS as taxable income. In other words, if you sold your home for $200,000 but you still had $240,000 left on your mortgage, the $40,000 difference would be considered income by the IRS, provided it was forgiven by your lender.

After the housing collapse last decade, this became depressingly common, so Congress passed the Mortgage Debt Forgiveness Act, which waved the requirement that filers report mortgage debt forgiveness as income. The act expired in 2013 and its 2014 status remained unclear until mid-December, when it was extended for one more year. Qualified filers this April will be happy, but the act’s status for the 2015 tax year is still in limbo.

Thanks for reading!

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Kathleen Finnegan

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