It’s almost that time of year… yes, tax season is almost upon us! If you are selling a house in the Bay Area, you will love these tax tips for selling your home! This article is for informational purposes only!
For specific questions, contact a trusted tax professional, or the IRS!
Not All Profits Are Taxable
When you sell your primary residence, you can exclude a significant portion of your profits from your tax return if certain conditions are met. The IRS allows you to exclude up to $250,000 of your profits from your tax return, and up to $500,000 if filing a joint return. However, if you sell your home for less than you paid for it, you won’t be able to take a deduction for that loss. To be eligible for the deduction, you must have lived in the residence for at least two of the past five years. It’s worth noting that this deduction is only available for the sale of your primary residence and can only be used once every two years. It’s important to keep your address updated with the IRS when you move to ensure that you receive any tax-related correspondence.
Other Exclusions
If you do not meet the criteria for the primary residence exclusion, there are still some special conditions that may allow you to claim a prorated tax-free gain. For instance, if you need to sell your property because of a health issue, a job relocation, or other unexpected circumstances, you may qualify for this deduction. However, the eligibility requirements for these special conditions can differ and should be examined with the help of a tax expert. They can provide guidance on what qualifies as an unforeseeable circumstance and what portion of your profit can be excluded from taxes. It is important to ensure that you are meeting the requirements set by the IRS to avoid any penalties or issues with your tax returns.
Reporting the Sale
If you receive a 1099-S form from the closing agent, you are required to report the sale to the IRS. The form contains information about the proceeds from the real estate transaction. However, if you are eligible to exclude all profits, you can inform the agent at the time of closing that the form is not necessary. If the form is still issued, you must file it with the IRS even if no tax is owed. It’s important to note that failing to report the sale, even if you don’t owe any taxes, can result in penalties from the IRS. Therefore, it’s best to keep accurate records and seek professional advice to ensure that you comply with all IRS regulations.
Capital Gains Taxes
When selling a property that is considered an investment or that you have owned for a short period, you will likely need to pay the capital gains tax. The amount of tax you pay will depend on how much money you make and can range from zero for those with lower incomes to as high as 20% for those in higher tax brackets. Short-term assets are typically taxed at the same rate as ordinary income.
First-Time Homebuyer Credit
If you received a credit for buying a home and then sell it within 36 months, you may have to repay all or part of the credit. The amount you need to pay back will depend on the specific dates of your home purchase and sale. It is important to keep this in mind if you are planning on selling your home within the 36-month window after purchasing it. Special rules apply and can be found in Publication 523 from the IRS.
Deduct Selling Costs
When selling your house in the Bay Area, you can deduct any reasonable costs associated with the sale, including closing costs, marketing expenses, improvements made to sell the house, assessments, and agent fees. It’s essential to keep track of every expense related to selling the property as these can amount to significant deductions come tax time. However, it’s important to consult with professionals such as your agent, accountant, and attorney to ensure you have set up the best terms for yourself regardless of the time of the year you sell your house.
While selling your home, you need not stress too much about taxes as it is highly likely that you won’t be paying any. Generally, selling your primary residence won’t attract any taxes on the profits earned from the sale, provided you meet certain requirements. For instance, you must have lived in the property for at least two years in the past five years before selling it. Also, the gain from the sale must not exceed $250,000 for an individual or $500,000 for a married couple. However, if you don’t meet these requirements or if you’re selling an investment property, you might be subject to paying capital gains tax.