Over The Hill: Downsizing?

BOSTON (CBS) – The real estate market has been busy this year. And if you sold your house this spring or have it on the market you may get a tax break when you sell your home. This tax break is intended to help seniors who are downsizing and have lived in their current home forever.

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain.

If your home has been your primary residence for two of the last five years you can exclude from capital gain on the sale up to $250,000 if you are a single taxpayer and $500,000 if you are married and filing jointly. You are eligible to use this tax break every two years.

So if you sold your house this year gather up all your house paperwork for you will need it when you file your tax return next year.

And you will need to go way back for the paperwork to when you first purchased the house and then begin the search for documents for any major improvements you made to the house like adding a new porch or storm windows. These improvements become part of the cost basis of your home.

For example; a couple bought a place in Brookline in 1987 and paid $100,000 for a grand old Victorian. The kids are now grown and a five-bedroom house is much too big for them. They put it on the market and it sells for $775,000. A potential capital gain of $675,000. But during the 30 years they lived there they replaced all the windows, added a two-car garage, paved the driveway, added a master bedroom and bath and a sun porch and deck.

These are considered capital improvements and their cost can be added to the basis of the house. They tally up their expenses and its $250,000. They can add that to the $100,000 to come up with the real cost basis of their home, $350,000.

They subtract this number from their selling price along with the realtor’s fees of $31,000 to get the real capital gain of $394,000. They are under the $500,000 exclusion so they will owe no capital gain taxes on the sale.

For more help get the IRS Publication 523

One more thing: This exclusion is for your primary residence and not your summer place on the Cape. To make it work for a summer place, sell your primary residence and use the exclusion there. Then move into the summer place on the Cape and live there for at least two years and you can use the exclusion again.

If you had a loss on the sale you do not get to take it on your tax return. I know it’s not fair, but taxes don’t have to be. And this tax break was intended to help older taxpayers who were downsizing and had lived in their current home forever.

IRS Memo on: How Selling Your Home Can Impact Your Taxes

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain. Here are ten tips to keep in mind if you sell your home this year.

  1. Exclusion of Gain.  You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
  2. Exceptions May Apply.  There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication 523, Selling Your Home.
  3. Exclusion Limit.  The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
  4. May Not Need to Report Sale.  If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
  5. When You Must Report the Sale.  You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale, you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
  6. Exclusion Frequency Limit.  Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
  7. Only a Main Home Qualifies.  If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
  8. First-time Homebuyer Credit.  If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.
  9. Home Sold at a Loss.  If you sell your main home at a loss, you can’t deduct the loss on your tax return.
  10. Report Your Address Change.  After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. Mail it to the address listed on the form’s instructions. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.

IRS Tax Tips provide valuable information throughout the year. IRS.gov offers tax help and info on various topics including common tax scams, taxpayer rights and more.

Additional IRS Resources:

  • Publication 5152: Report changes to the Marketplace as they happen — English | Spanish

IRS YouTube Videos:

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You can hear Dee Lee’s expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

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