What Will Home Sellers Have to Pay in Taxes?

Homeowners with profits from sales of their primary residences get one of the biggest breaks in the tax laws. However, sellers often misunderstand the rules that allow them to “exclude.”

Dec 17th 2019
Share this content
home for sale
iStock_stevecoleimages_forsale

Homeowners with profits from sales of their primary residences get one of the biggest breaks in the tax laws. However, sellers often misunderstand the rules that allow them to “exclude,” meaning they escape taxes on hefty parts of their profits—up to $500,000 for married couples filing jointly and up to $250,000 for single persons and married couples who file separate returns.

Two requirements for exclusions: First, sellers have owned and used the property as their principal residence or main home for at least two years out of the five-year period that ends on the date of sale. Second, they’ve not excluded gain on the sale of another principal residence within the two years that precede the sale date.

Those two years needn’t be consecutive. They can fall anywhere within the five-year period.

Short temporary absences: Vacations or other seasonal absences aren’t a problem. Sellers can count them as periods of owner use. 

Profit exclusions aren’t one-time opportunities: Sellers generally can claim exclusions as often as every two years.

Exclusions aren’t just for sellers of conventional single-family homes: For instance, their principal residences can be condos or co-op apartments.

Partial exclusions: All’s not lost for those who’ve sold another principal residence within the previous two years or who’ve not owned the property or lived in it for the required period of time.

Sellers may be able to claim partial exclusions when the primary reasons for their sales are: health-related (such as moving to new school districts for special-needs children); work-related (change in place of employment); or events that they couldn’t reasonably have anticipated (broadly defined by the IRS to include death, divorce, or legal separations, or natural disasters that cause residential damage—hurricanes, for instance).

Example of a reduced exclusion: A person who sells the home after one year, for example, would qualify for half the maximum exclusion.

Improvements: Homeowners can’t claim current deductions for capital improvements. They must add them to what’s called their home’s basis—the figure used to determine gain or loss when they sell. So, unlike routine repairs and maintenance costs, such as repainting rooms or replacing broken windows, improvements decrease any taxable gains on eventual sales.

Losses on sales: They aren’t deductible as long-term capital losses. An unyielding IRS refuses to make any allowances for extenuating circumstances. For instance, it prohibited a deduction for a loss caused by a doctor-recommended move from a two-story to a one-story home to allow a child the maximum use of his wheelchair.

Help from the IRS: For more details, see IRS Publication 523, “Selling Your Home,” available at irs.gov, or call 800-TAX-FORM.

In a later column, I’ll discuss income tax breaks that become available to older couples when they sell their personal residences.

Best Wishes Dear Readers for a Happy New Year. I'm someone who keeps creditors at bay and bread on the table only because I've “a certain talent” for articles that demystify the Internal  Revenue Code. In the course of four-plus decades, I've written several thousand articles. They've appeared in print publications, such as Playboy, Reader's Digest and Vogue. And in electronic  outfits, most notably in AccountingWEB, where my articles debuted in April of 2014. Delve into its archive of more than 300 of those articles.

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.