Tax Liabilities: How Much Do I Owe From Home Sale?
Generally when people sell their homes, the furthest thing from their mind is whether they are going to have to pay taxes on the sales price of a home. Fortunately, many homebuyers will never have to be worried about this since there are several exclusions for homeowners who sell a home. Here are some of them:
Exclusion from claim - the typical exclusion from a sale of a primary residence is $250,000 per person. If the home is jointly owned, both persons may claim this exemption on their taxes if they file a separate return and if a joint return is filed they may exclude up to $500,000. Two conditions apply to this exclusion - they are:
- The owner(s) must have lived in the home for at least two years out of the past five years (this is called an ownership and use test);
- During the two years preceding the sale date you did not use this exclusion on another property.
It is also important to note that there are exclusions to the ownership and use test that include:
- Military service
- Deceased spouse taking over home
- Medical issues that prevent a person from living alone (or someone is transferred to a hospital or nursing home)
- other exclusions may also apply
The Internal Revenue Service provides for certain exclusions in addition to these amounts. These may include closing costs, attorney fees or other costs associated with selling a home.
Calculating Your Taxes
For homeowners who have sold a home for more than the purchase price, they may have a concern about what happens to the capital gains. This often means that people are concerned about the percentage of taxes that must be paid on a home sale. Unfortunately, there is no quick formula, because of various exclusions from the gains realized on a home sale. However, there are other items that must be taken into consideration when selling a home.
The Internal Revenue Service asks that a person who sells a home set a cost basis for their home. This cost basis is a combination of the price that the home was purchased for minus any seller allowances, cost of certain improvements, etc. There is a worksheet that is provided by the Internal Revenue Service that will help the seller of the home reach the appropriate cost basis. Once this sheet has been filled out properly, the homeowner will know if they are liable for any taxes on the sales price of their home.
Once a homeowner has determined the adjusted cost basis, if there is any gain over the exclusion amount it should be reported on Schedule D (Capital Gains). Worksheets that were used should be kept with the tax records as well as a copy of all of the documents that support the adjusted sales price. In addition, copies of the HUD-1 (settlement forms) and copies of the purchase and sales agreement will help support the claim.
Internal Revenue Service
- Publication 523 https://www.irs.gov/pub/irs-pdf/p523.pdf
- Form 8939 https://www.irs.gov/pub/irs-dft/f8939--dft.pdf
- Schedule D https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
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