8 Vital Tax Issues Every Home Seller Must Know

Facts About Tax Breaks For Home Sellers

In case you are planning to sell your home, you should learn more about tax breaks, particularly regarding the profit that you could make from the sale of your property. Be aware, however, that today's tax code is a little different from its predecessor. If you want to know, if you're eligible for a tax break or not under the existing tax laws, read on below.

1Tax Breaks From Property Sales

When you sell your home, you could get a huge tax break. It's even possible to exclude $500,000 and up from the capital gain that you could receive. This is the only and the biggest tax break that you could have. Thus, if selling your home is a definite possibility, you should begin doing some research on tax laws.

By timing and structuring the home sale properly, you could save a lot of money that could otherwise go to taxes. According to the law, anyone, regardless of age, can exclude up to $250,000 from their profit upon sale of a certain property. The amount is likely to double if filed jointly.

2What "Gain" Means

In case you bought a property many years ago, this will have gain, and you probably owe taxes on the said gain. Gain pertains to the difference between the net selling price and the adjusted basis. The calculation is a little complicated, and so it must be computed by a tax expert.

When selling a house, you must plan it with taxes in mind because your eligibility for tax exemption depends on a variety of factors, and the exclusion can even amount to $500,000, particularly when filed jointly. That excluded amount on your gain is very significant, especially as regards tax liability. Hence, many believe that filing jointly is a feasible and important option.

3Eligibility For A Tax Exclusion

A few requirements must be met to determine if you are eligible for a tax exclusion or not. First, the property/home must be your primary residence, meaning that you should own it and have lived in it for at least two years for the past five years. Moreover, the exclusion can only be claimed once every two years.

The next requirement is fairly straightforward: your situation or claims must perfectly fit the bill, so to speak. (It won't count if you end up with something that's just "close enough.") There were different rules before changes were made on the tax code in 1997, so make sure that you are not referring to outdated regulations as such no longer apply. Carefully assess which regulations are no longer current.

4The Old Vs. The New Tax Code

Based on the old tax code, in order for you to be eligible, you must purchase a new place that is of the same value as your previous property. In this case, the amount cannot be considered as an exclusion but rather a deferral because the gain was only deferred to the new property. But the new tax laws no longer require sellers to buy another place so that they could defer their gain to it.

Now, you can reinvest or use your property "gain" in whatever way you prefer, like purchase another house, gamble it away, or perhaps spend it on a great holiday. Before, you need to be at least 55 years old to be eligible, which is no longer the case today. Thus, you must understand that just because you were eligible then doesn't mean that you are also eligible now and vice versa. Still, in general, your gain is given back to you.

5The "Primary Residence"

The primary residence pertains to the house where you spend most of your time in. It is where you live most of the time. In case you have two properties, like a vacation house and a primary residence, you can determine which is your primary residence using a number of factors. Among the crucial determining criteria that aid in identifying which one is your primary residence are the following factors: it is where your family lives; it is close to your workplace; it is the address stated in your voting information, and it is where your tax returns and other bills are addressed.

6Primary Residence And Exclusions

The tax exclusion is only applicable to the primary residence; this means you need to have lived in a particular property for two out of five years. (You have to wait for two years before you can be eligible if you just recently moved in.) But there are also specific situations that could make you eligible for exclusions. Therefore, if you wish to gain some profit on your property, carefully plan your taxes; and it will work to your advantage if you stay in a certain house for a few years before selling it.

7Waiting For Two Years Before Reselling

It's possible for things to change in a few years, although you are probably content with your house at present. There are many reasons why you might consider moving away and selling your property, like getting a new job in a different state, marrying someone and moving away, or perhaps going to a new place for health reasons. Instead of selling, one option that you should consider is renting your place out. If you are renting out your property, this does not automatically cancel your eligibility; but see to it that you've resided in the said property for the specified number of years. In other words, you have to live in that property for two out of five years and rent it out for the remaining three years.

8The Advantage Of Renting Out Your Home

It's important to understand that the length of time that you've either lived in your home or rented it out does not need to be continuous. To illustrate, you could stay at your house for a year and rent it for the next three years before going back to the house and living there for another year. This way, you fulfill the requirements. Moreover, you can also take short vacations.

However, you should be careful. A month-long cruise will not affect the status of your occupancy as it's considered temporary. On the other hand, your status will change if you decide to live abroad for about a year. The IRS may consider your move as "not temporary" even if you did not rent out your place.

Discuss your options with a finance professional, especially if you are still having doubts about whether it's the best time to sell your home or not, or if you're confused about the exclusion eligibility requirements. Real estate experts can also help clarify a few things for you, and they can help in assessing whether or not it's the right time for you to sell your home. In case you decide to delay the sale of your home, you could still earn from it by renting it out, especially if you plan to live in another place for a short while.

About Author

John Quintana

John Quintana is a proud Cuban, a lifelong resident of Miami, Florida, where he lives surrounded by a loving family. When he's not writing, he spends his time either fishing or in the kitchen.