We’re only about a month away from one of the most dreaded days of the year for many Americans: Tax Day. Tax returns must be mailed by April 15th, and in the weeks leading up to the due date many Americans often have a number of questions about different things they’ve done and different money they’ve made over the last year. One common question has to do with selling your home—if you sell your house, do you have to claim the money you made from the sale on your taxes? Is the profit from selling your home going to be partially negated by increased tax liability?
While we can’t tell you about your own specific situation for certain, we can tell you a little more about some of the things you can expect and some of the general rules or guidelines you’ll have to follow for claiming the income you receive from selling your home. In this blog, we’ll cover this and a few other common tax questions pertaining to selling your home.
Do I Have to Pay Taxes on the Income from Selling My Home?
If you’re looking to sell your home, tax implications may be a huge cloud over your plans, especially if you’re uncertain as to how exactly you might be impacted. First off, there’s good news: if you’re considering selling your home, you may not even have to claim the sale on your return whatsoever. Whether or not you do depends on three factors:
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How long you owned your home, and when you owned it
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How you used that particular home
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How much profit you made from the sale
The general guideline for reporting your home sale is this: if you lived in the home you sold as your primary residence for at least two of the five years prior to the sale, then you may claim up to $250,000 of the profit from the sale tax-free, and up to $500,000 if you’re married and filing a joint return. Note: this is not the value that you sold your house for, but the profit you made from selling the home. For example, if you bought your home 20 years ago for $200,000 and you sold it this year for $500,000, then value of the sale would be $300,000.
If the profit exceeds the $250,000 or $500,000 limit, then you are required to report the excess profit on Schedule D of your return as a capital gain. If you sold your home at a loss, however, you cannot claim that loss as a deduction, which is different from many other different types of losses.
Qualifying For a Home Sale Tax Break
There are three different tests you must pass in order to treat the gains from your home sale as tax-free. Failing any one of these tests means you will have to claim the entire profit from the sale as a capital gain and thus pay taxes on it.
The three tests are:
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Ownership: You must have owned your home for a minimum of two years (either 730 days, or 24 full months) during the five years preceding the sale
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Use of property: You must have used the home you are selling as your main residence for at least two of the five years before the sale
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Other sales: If you sold another property within two years prior to the date of the sale, you must not have previously excluded the gain on the sale of that property on your tax return
There are some extra exceptions to these rules that may apply for special circumstances, such as for those who are divorced and obtained the property as a part of the settlement, or homes that were lived in but then rented out later. It’s strongly advised you speak with a financial advisor or a tax accountant to find out more about your exact situation so you can set up your tax return for the greatest legal benefit.
If you need assistance selling your home, trust a Valencia realtor with years of experience! Call Dippy Chhina at 661.441.3304 today.
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