Selling your home can be an exciting experience. The cash you receive may be burning a hole in your pocket. Before spending the cash too quickly, you must understand the tax consequences of the sale to determine if the tax man is entitled to a portion of your proceeds.
A sale of your principal residence may be eligible for exclusion of up to $250,000 ($500,000 for joint filers) of the gain. To qualify for exclusion, generally you must have owned and used the property as your principal residence for two of the last five years. Also, you may not use the exclusion if you excluded gain on another principal residence within the last two years.
You should maintain thorough records of your tax basis (see my prior blog on Document Retention) to support an accurate tax basis, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. You should note that gain allocable to a period of “nonqualified” use generally isn’t excludable.
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
Gain exclusion is available only on the sale of your principal residence, not a second home. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
If you’re considering putting your home on the market, please contact me at HZemel@BerdonLLP.com or your Berdon advisor to learn more about the potential tax consequences of a sale.
Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.