You may be able to avoid paying taxes on the profit of your home sale. Want to know how?
You can take advantage of $250,000 Exclusion on the Sale of a Main Home
Under the current law, Individual homeowners can exclude up to $250,000 in profit from the sale of a primary residence. Married couples can get a double benefit and take advantage of up to $500,000 exclusion. The key requirement is that you have owned the home and lived in the home for a minimum of two years. The good news is that these two years do not have consecutive. You are required to spend 24 months our five year period for the qualification of this exclusion. You can also strategically plan the sales of your home or investment property by keeping this rule in mind.
This is a great way of building wealth. You can sell the property and take the profit tax-free. Now you can reinvest the same funds into another property. This allows you to increase your cost basis even if this property is an investment. You can also do this multiple times. This is probably one of the best legal ways of not paying income tax.
Selling Your Home Due to Job Relocation
If your Job location has changed or you have started a new job than you can still avoid paying some of the taxes on the home sale. Consult with your CPA to see if you can qualify for this kind of deduction.
Selling Home Due to Health Reasons
IRS may also allow you to exclude some of your Income from primary residence if sold the house due to health reasons. This one can be tricky. Make sure to keep proper documents including a note from your physicians. Also, make sure to consult with your CPA before putting your home on the market.
There are some other similar reasons that may help in avoid paying tax on home sale income. For example, natural disasters, acts of war, acts of terrorism, change in employment or unemployment that left you unable to meet basic living expenses, death, or divorce.
What about the Loss on the sale of a Home
Under current tax laws, there is no provision to deduct the loss from the sale of your primary residence.
How to Report the Gain on the Sale of Your Primary Residence
Gain from the sale of a property is considered capital gain and it is reported on Schedule D. Gain is considered short-term capital gain if you owned the property for one year or less. Similarly, the gain is considered long-term capital gain if you owned the property for more than one year.
Calculating your Cost Basis and Capital Gain
The formula is fairly simple. Just calculate total income and subtract the total cost. Your cost can include purchase price, purchase cost (escrow or agent fees), improvements, selling cost, depreciation.
It is always a good idea to bring a CPA in a picture if you are looking at substantial gain or loss from the sale of a property. Your CPA can advise how to structure the sale of your property so that you can minimize the tax implication.