Tax Implications: Selling Your Home

Estate Tax Minimization

by Kira S. Masteller
818.907.3244

If you’ve lived at a property for at least two out of the five years before you sell your home, you can consider that property your primary residence or “main home”, per the Internal Revenue Service.

The IRS will then figure in the selling price, amount realized, and the adjusted basis (net cost after depreciation deductions and capital expenditures) to determine your gains or losses on the sale.

Special circumstances may qualify you for a partial exclusion if you don’t meet ownership/residence tests.

Tax Benefits for Selling Your Primary Residence

If you have gained, the profits from the home’s sale are generally excluded from tax for up to $500K for married couples filing joint returns and $250K for individuals. There are tests to qualify for this exclusion:

1. Primary Residence Ownership: You had to have owned the home for at least two of the last five years.
2. Use as a Primary Residence: You had to have lived at the property for a 24 month period in the five years prior to the date of sale.
3. Prior Exclusions: You qualify so long as you did not use the $500K/$250K exclusion within the last 24 months. In other words, you can keep employing these exclusions for selling a series of primary residences every two years.
4. Married Couples: At least one spouse must qualify for the exclusion, and both spouses must have used the property as a primary residence as outlined above.

Special circumstances like divorce, change of health or certain unforeseen events may help you qualify for a partial exclusion, if you do not meet the 24 month ownership or residence tests.

You may also be able to extend the exclusions to a second home, if you convert it to a primary residence before selling, though the laws governing this practice have severely limited property owners from doing this since 2008. Still, you may be able to exclude 10 percent of the your gains when selling second or vacation homes.

Home Sales and Tax Obligations

The remainder of your profits (on sales after January 1, 2013) may be subject to the Net Investment Income Tax (NIIT), at a rate of 3.8 percent, dependent on factors like the seller’s net investment income. The NIIT affects individuals as well as most trusts and estates.

First time home buyer credits may need to be repaid when you sell, depending on when you purchased the property.

Previously, you may have postponed tax obligations on home sales by using the proceeds to buy another primary residence – deferring what you owed the IRS under what was called rollover rules. The law changed in 1997, and rollover rules will no longer apply.

Other IRS Considerations

You must report any gains that exceed the exclusion amounts above, though we recommend you report all real property sales anyway. If you received Form 1099-S, report it.

Kira S. Masteller is a Trusts & Estate Planning Attorney at our firm. Contact her via email: kmasteller@lewitthackman.com, or by phone: 818.907.3244.

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