Each year, clients either come into our Richardson, TX tax office and ask if they need to pay taxes on the sale of their residence, call concerned about taxation on the Sale of their personal residence, or make an assumption that income on the Sale of a personal residence is NEVER taxed. Today, I want to take a few minutes to discuss the tax consequences of the Sale of a Principal Residence.
Is Income from the Sale of a Personal Residence Ever Taxable?
It can be if it exceeds the excludable amount. Section 121 of the Internal Revenue Code excludes a gain of up to $250,000 ($500,000 if the taxpayer and spouse file jointly). Be careful in what you consider to be Gain. Your Gain is not the amount that you walk away with or the difference between the sales price of the home and outstanding loan on it. Your Gain is the based on the Sale Price of the Home less qualified costs of selling the home and the “Cost Basis” of the home.
Do all Homes Qualify?
In order qualify for the Section 121 exclusion, you must meet both the ownership and use test. You must have owned and used the home as your main home for an aggregate of two of the last five years prior to the sale of the property. If you meet both tests, generally you qualify. If you don’t, you’re not eligible. In addition, if you’ve excluded the gain from the sale of another home within two years, you don’t qualify for the exclusion.
Reporting the Sale
If you do need to report the sale, you will typically report the sale on Form 8949 and on Schedule D on your form 1040. In some cases, a home sale may be sold where payments are made over time and the seller may elect to report using the Installment method and reporting on Form 6252.
Do you Need Help?
If you would like help from a firm that specializes in working with realtors and real estate investors, as well as helping those who have IRS problems, please give us a call at (972) 821-1991 or send me an email at [email protected].
