Tax Tips: Things you need to know about selling your home
NEW YORK - Forbes.com has teamed up with the authors of Ernst & Young Tax Guide 2006 to develop a series of tips to help you avoid paying more tax than necessary. The circumstances of your situation will determine if you qualify, so review the tax code and check with your tax adviser.
Here are 10 things you need to know about selling your home.
1. Your Best Tax Shelter
Your home is probably the most valuable asset you own and may increase in value. Your home is probably your best tax shelter. You can completely exclude up to $250,000 of gain ($500,000 if married and filing jointly) on the sale of your home.
2. Long-Term Gain
Any gain you are required to recognize on the sale of a home will be treated as long-term capital gain if the home was held for more than one year. The maximum tax rate applicable to net capital gains is 15 percent — and may be as low as 5 percent. This is significantly lower than the top tax rate applicable to ordinary income.
3. Main Home
The home you live in most of the time is your "main home" for tax purposes, and can be a house, houseboat, mobile home, co-op apartment, or condominium.
4. Selling Price
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages or other debts assumed by the buyer as part of the sale and the fair market value of any other property or any services you receive.
5. Payment By Employer
You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Your employer will include it as wages in box 1 of your W-2 form, and you will include it in your gross income as wages on line 7 of the 1040 form.
6. Amount Realized
The amount realized is the selling price minus selling expenses. Selling expenses include commission, advertising fees, legal fees, and loan charges paid by the seller, such as loan placement fees or "points."
7. The Sale Of More
Than One Home
You can't exclude a gain on the sale of your home if, during the two-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you can't exclude the gain, you must include it in your income.
8. Unforeseen Circumstances
You still can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if the reason you sold the home was a) change in place of employment b) health c) unforeseen circumstances that you couldn't reasonably have anticipated before buying and occupying your main home.
9. Reporting The Sale
Do not report the 2005 sale of your main home on your tax return unless: a) You have a gain and you don't qualify to exclude all of it; b) You have a gain and you choose not to exclude it.
10. How To Report
If you have any taxable gain on the sale of your main home that can't be excluded, report the entire gain realized on Schedule D of Form 1040.
— Source: Forbes.com
