Whether you are planning for retirement and downsizing, or are in the process of upgrading to a larger home, it is important that you take into consideration the tax effect of selling your home. With proper planning it is possible for you to save taxes upon the sale of your home. Despite the many changes made by the 2017 Tax Act, the tax savings provisions for the sale of a homestead have not changed.
Your home is a capital asset. As a general rule upon its sale you would be required to pay capital gain taxes on the difference between the sales price (with adjustments) and your original purchase price (with adjustments). With the value of real estate in South Florida continually rising you may have a substantial gain on the sale of your home. However, if you meet the requirements of the tax law, you may end up paying little or no tax on the sale. So, what are these requirements?
1. The property being sold cannot have been acquired in a like-kind exchange during the last five years.
2. You are not subject to the expatriate tax.
3. You must have owned the home for at least two out of the five years immediately preceding the date of the sale. In the case of a married couple, only one of the spouses must meet the ownership requirement.
4. The home was your principal residence, and you must have lived in the home, for at least 24 months of the five years immediately preceding the date of the sale. There is no requirement that the 24 months of residence be continuous so long as they occurred within the 5 years preceding the sale. In the case of a married couple, both spouses must meet the residency requirement.
5. You cannot have taken an exclusion from the sale of a home during the last two years prior to the sale from which you are now seeking to exclude gain.
If you meet all the requirements you can exclude up to $250,000 of gain from your income upon the sale of the home. If you are filing a joint return, you can exclude up to $500,000 of gain from your income. If after application of the exclusion you have no gain from the sale of the home, you do not need to report the transaction on your return. If you still have gain to report on the sale after applying the exclusion then you must report the gain from the sale on your tax return. If you received a Form 1099-S upon the sale of the home, you must report the transaction on your return whether or not you had gain upon the sale. Note that a loss from the sale of your principal residence is not deductible.
The exclusion from gain is not a one-time benefit, rather it can be used any time you sell your principal home so long as you meet all the requirements discussed above. The exclusion does not apply to rental properties or vacation homes since these are not your principal residence. However, with proper planning you may be able to convert a vacation home into your principal residence and qualify for the exclusion.
There are exceptions to the general rule for some individuals such as those with disabilities, certain military personnel, the intelligence community and Peace Corps workers which are beyond the scope of this article. As with all tax laws, you should consult with a knowledgeable tax professional to determine the effect of the law on your particular situation.