Real estate taxes can be tricky to understand.
If you are in the process of selling your home, you probably aren’t thinking about taxes. But, the sale of a home has a significant impact on earnings and returns. So, to prevent you from stressing this tax season, we’ve outlined four of the most common real-estate tax questions we receive.
1. Can I Exclude Gains?
If you earned money from the sale of your home, you would be happy to know that you can exclude the earnings from your taxes. However, this is only possible if you have owned the property for (at least) two of the last five years. And you will have had to have lived in the property for at least two of the last five years. But, if you sold your home at a loss, it is important to note that you cannot take a deduction for it.
2. How Much Can I Exclude?
If you meet the criteria to exclude gains, one of the most common follow-up questions we receive is how much can be excluded from your taxes. To answer this question, it will depend on how you are filing. If you are filing as an individual (and pass the ownership/use test) you have a gain of up to $250,000.
For those filing jointly, you have a gain of up to $500,000 so long as you or your spouse pass the ownership and use test. In both of these instances, you can only exclude it if you have not excluded gains from your taxes on another property within the last two tax years.
And if your profit exceeds the $250,000 and $500,000 limit, the excess will need to be reposted as a capital gain on Schedule D.
3. Do I Have to Report the Sale?
You will need to report the sale of your home on your tax return if you do not meet the exclusion criteria (based on ownership and use) and if you received Form 1099-S. Form 1099-S is typically issued by a real estate closing agent, the mortgage company, a real estate broker, or a title company. This is a form that they forward to the IRS that outlines the sale. Meaning, the IRS will have been notified about the sale even if you have not claimed it yet.
To avoid getting this form you will need to give the agent or broker assurance after the sale that the profit is indeed tax-free. The assurance that you will need to give them is that you have met the ownership and use stipulations (and can prove it) and that the property was not used for business or rental purposes. You can also avoid this form if the sale price is $250,000 (or less) or $500,000 for married couples with the gains being $250,000 or less.
4. If I Receive Form 1099-S Does It Mean I Owe?
Just because you received Form 1099-S, it does not mean that you will have to pay taxes on the sale of your home. The majority of the time we see Form 1099-S issued because it was done in error or simply because the closing agent was not given all the proper paperwork after the sale. For this reason, it is important to keep all of your documentation handy and consider having it reviewed by a professional who will ensure the agent is made aware of the tax rules.
Depending on how your sale goes, and whether or not you meet the ownership and use criteria, you could end up saving big on your taxes this year. So, if you are thinking of selling your home consider getting some professional help this tax season by speaking with us at 407-328-5001.
Image: Unsplash
