Tax Considerations When Selling your Home.

This is the time of the year when people move. Besides all the real estate activities, you need to be familiar now with the term capital gain.  In this transaction, Capital gains are considered the profits you earned from the sale of your home. Capital Gains are taxable.   You may have to pay federal taxes on the profit. However, you may qualify to exclude all or part of any gain from the sale. Therefore, make sure you understand the law. The amount of tax you owe depends on how long you owned and lived in the home before the sale, and how much profit you made.    Homeowners should consider these benefits prior  starting the selling process.

Additionally, the State of Florida, contrary to other states, has no capital gains tax.  

• In Florida you will pay Documentary Stamp Tax. This is a tax that is paid on the transfer of real estate. The rate is 0.7% of the sale price, except in Miami-Dade County, where it is 0.6%.
• Property taxes: Property taxes are due annually in Florida, but they are paid one year in arrears. This means that the seller is responsible for paying the property taxes for the year in which they sell the house, even though they will not actually own the property for the entire year.
• Intangible tax: This is a tax on the transfer of intangible assets, such as stocks, bonds, and mortgages. The rate is 0.005% of the sale price.
• Title insurance: Title insurance protects the buyer against any defects in the title to the property. The seller is typically responsible for paying for the buyer's title insurance.
• Recording fees: Recording fees are charged by the county clerk's office to record the deed to the property. These fees are typically a few hundred dollars.

What is the extension of the Tax Exclusion?

If you meet certain requirements, you may be able to exclude up to $250,000 of your profit from your taxable income if you are single, or up to $500,000 if you are married filing jointly. These are the ownership and use tests required by IRS:

• You must have owned and used the home as your primary residence for at least two of the five years before the sale.
• You cannot have excluded any gain from the sale of another home in the two years before the sale. Homeowners excluding all the gain do not need to report the sale on their tax return unless a Form 1099-S was issued.

If you meet these requirements, you will not have to pay any federal capital gains tax on the first $250,000 ($500,000 if married filing jointly) of your profit. Any profit above that amount will be taxed at your ordinary income tax rate.

You should know that there are specific regulations for every individual. Above exclusion is not for everybody, there are some Automatic Disqualifications and exceptions to the Eligibility Test according to the IRS Publication 523: “Selling Your Home”.  These are a few of the exceptions: 

-    Separation or divorce occurred during the ownership of the home.
-    The death of a spouse occurred during the ownership of the home.
-    The sale involved vacant land.
-    You owned a remainder interest.
-    Your previous home was destroyed or condemned.
-    You were a service member during the ownership of the home.

 Therefore, if you have further questions about the tax implications of selling your home, you should talk to a tax advisor to avoid a wrong tax return. 

Additionally, please consider following IRS tips when using a paid tax preparer, a paid tax preparer is: 

• Primarily responsible for the overall substantive accuracy of your return, 
• Required to sign the return, and 
• Required to include their preparer tax identification number (PTIN). 

Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return.

What if I don’t have a gain in the selling?

If you are selling your main home for less than you paid for it, it is considered a loss and it’s not deductible.  Remember that some events could affect the value of real estate properties like improvements that add value to your home, depreciation which represents increasing value of your property, or any losses.  These events are considered under “adjusted basis” Therefore, have clear records of your property events prior consider gain or loss.

An important note on depreciation on home used for business or rental is that you may need to pay back (“recapture”) some or all the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return.

Homeowners who own more than one home can exclude the gain only on the sale of their main home. They must pay taxes on the gain from selling any other home.

If you used all or part of your home for business or rental, you may need to pay back (“recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return.

Other Taxes

In addition to federal capital gains taxes, you may also have to pay state income taxes on the profit you make from selling your home. The amount of state income tax you owe will depend on your state's tax laws.

You may also have to pay real estate transfer taxes to your state and/or county. These taxes are typically based on the sale price of your home.

How impact my return a forgiven or canceled Mortgage debt

Keep in mind that you must report forgiven or canceled debt, like mortgage workout, foreclosure, or other canceled mortgage debt on your home, as income on your tax return. 

How to Report the Sale

If you sell your home and must pay taxes on the profit, you will need to report the sale on your federal income tax return. You will receive a Form 1099-S from the buyer's closing agent that will show the sale price of your home. You will use this information to report the sale on your tax return.

For the homeowners that don’t qualify to exclude the whole taxable gain from their income, must report the gain from the sale. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return. If you receive Form 1099-S, Proceeds from Real Estate Transactions, must report the sale on your tax return even if they have no taxable gain.

Conclusion

Selling your home can be a profitable event, but it is important to understand the tax implications before you sell. By understanding the tax rules, you can minimize your tax liability and maximize your profit.  I strongly encourage you to be familiar with the IRS Publication 523: “Selling your home” that you can find searching in www.irs.gov 

Please keep good records of your home's purchase price, improvements, and expenses. This information will help you determine your cost basis and calculate your gain or loss.