It used to be the rule you could exclude the gain on the sale of your home if you reinvested in a new home within 2 years. But this is no longer the case–in fact, it’s a much better rule now. Now there is a capital gains exclusion of up to $250,000 ($500,000 if married-filing-jointly) of the gain on the sale of your main home (your residence) if you meet certain standards. Myths about the sale of your home, and the tax consequences, abound (as is the case with income tax in general). Following are some tax-related myths people still believe about the sale of their home. Be sure to read at the end about some tax-traps that people can accidentally fall into causing large tax consequences.
Myth:
You can’t claim the capital gains exemption if you’re not living in the house at the time of sale. Sounds too good to be true!
Fact:
You don’t have to be living in the home at the time of the sale. You simply have to have owned and lived in your home for two of the five years prior to sale–and these years don’t have to be sequential. However, if you’re planning on renting your home out in the interim, there are some additional facts you’ll want to be aware of. Contact E. Daniel Miller, CPA, PC to discuss the facts of your particular situation. Contact us! or email tax@edanielmillercpa.com.
Myth:
You can’t claim the capital gains exclusion unless you’re over the age of 55.
Fact:
While this USED to be the rule, you can buy and sell as much as you want (regardless of age) during your lifetime so long as you meet the other criteria.
Myth:
You can’t claim the capital gains exclusion unless you invest the proceeds from your home into the purchase of a new house.
Fact:
Nope, while it USED to be if you sold a house you could only claim the exclusion if you used the proceeds from the sale of your home to buy another house within two years, this rule no longer applies; the IRS has no stipulation on what you do with the proceeds from the sale (I’m skeptical too–but it’s true).
Myth:
You can claim the capital gains exclusion for any number of homes.
Fact:
You can only claim the exclusion for one house at a time that is your principal residence (it can’t be vacation, rental, or other investment property).
Myth:
You are trapped with a capital gain on the sale of a house since you can only offset the gain with a loss from another sale of a house
Fact:
You don’t have to have a capital loss on the sale of a home in order to offset the gain on another home.
Myth:
You can claim a capital loss if you lose money on the sale of your home.
Fact:
You can never claim a capital loss on the sale of a personal residence (I know, it doesn’t seem fair–especially with our economy in the last many years). But if you’re in a situation where you’ve had a short sale or foreclosure, then please contact us to help you navigate the forgiveness of debt notices you might receive–and be required to report–on your tax return. E. Daniel Miller, CPA, PC or email tax@edanielmillercpa.com.
Myth:
You can deduct the cost of painting and other improvements for the purpose of getting the house ready for sale.
Fact:
Now, don’t be dismayed as there are items deductible in preparing your home for sale; however, normal maintenance and repairs (in general, think of these as things you would have completed anyway) cannot be deducted. BUT, significant items such as additions or things that extend the life of the home are “added to the basis” and therefore benefit you in a sale.
Myth:
“Obamacare” imposes a 3.8% additional tax on the sale of all real estate.
Fact:
Currently, a Medicare tax of 3.8% is imposed on investment income for high income taxpayers (is this you?–tax@edanielmillercpa.com). Investment income does include home sale gain. BUT the exclusion still applies for purposes of the Medicare tax no matter what your income level. So if your income–
–is below the threshold, the Medicare tax does NOT apply.
–if your income is above the threshold, but your gain is under the exclusion amount, the Medicare tax does not apply.
Make sense? Of course not! Contact us for your particular situation: E. Daniel Miller, CPA, PC or email tax@edanielmillercpa.com.
Myth:
Moving expenses are always deductible.
Fact:
You can only deduct moving expenses which are work-related (and even then–of course–according to strict rules). So when moving for personal reasons, moving expenses are never deductible.
Tax Traps!
Seller-Financed Sale: A common transaction for a home sale is the seller’s financing of the buyer’s purchase. The seller takes a down payment and finances the remaining amount over a period of years. This action alone requires certain tax preparation treatment in order to recognize any gain on the sale over a number of years (year-by-year as the cash is received by the seller). But sometimes the buyer unfortunately defaults, which causes the seller to then take back ownership of the home. By this time, the seller has received a down payment as well as a portion on the financed balance. This can cause the seller to permanently lose the capital gains exclusion. If you find yourself in this situation, there can be tax remedies. Please contact us to discuss the specific facts: E. Daniel Miller, CPA, PC at (888) 734-3933 or tax@edanielmillercpa.com.
Rental Converted to Residence: The sale of rental property can trigger a taxable gain if it does not meet the tests as a principal residence. In some instances, rental property is rented to children or other family members for a period of time with the intention of meeting the principal residence test and therefore acquiring the capital gains exclusion. However, some taxpayers have been uninformed about such tax transactions, and the IRS has disallowed the capital gains exclusion–and on top of that has imposed accuracy and understatement penalties also. Understanding the facts is important, and well worth a free initial consultation. Please feel free to contact E. Daniel Miller, CPA, PC at (888) 734-3933 or tax@edanielmillercpa.com for advice.
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