Selling A Home and Your Tax Liability
When selling a home, either your main home or rental property, you want to know what you will owe Uncle Sam and how much you can keep. Is there a way around paying taxes when you sell your property?
Determining Capital Gain or Loss When Selling A Home
The difference between the amount realized and the adjusted basis of your property is your gain or loss. You gain is taxable and a loss can be deductible, depending on the type of property. The two property types involving the selling of real estate are:
Primary Residence Exclusion for Sale of your Property
You can avoid paying taxes on the gain from the sale of your residence. Under the present rules you can exclude up to $250,000 of gain on the sale of your principal residence. The amount increases to $500,000 if you are married. If your gain from selling a home is within the $250,000/$500,000 limit, you don’t even have to report the sale on your tax return.
Starker 1031 Tax-Deferred Exchanges for Real Estate
Certain exchanges of property are not taxable. This means that any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or dispose of the property you receive.
A 1031 exchange allows the deferral of capital gains taxes and recapture of depreciation. With the 1031, like-kind exchange, you can sell a piece of property that is highly appreciated and roll over the gain into another piece of property. The second piece must be another piece of business or investment real estate. You cannot do a 1031 like-kind exchange on your personal residence.
Note that you cannot exchange U.S. real estate for foreign real estate tax free.
Recapture Depreciation on Real Estate
As you are probably aware, depreciation reduces your basis for figuring a gain or loss on a sale or exchange of your property. When selling a home you will be required to recapture the depreciation at ordinary income tax rates or capital gains, in some cases. This is known as depreciation recapture. Depreciating real estate can produce a tax write off but when you sell the property the tax loss will come back to haunt you as a capital gain
on the sale of your property.
Home Selling Tips
When selling a home, you probably know that a house that is visually appealing and in good condition will attract potential buyers driving down the street. Here is an example of a checklist that lets you look at your property through an outsider’s eyes:
- Are the lawn and shrubs well maintained?
- Are there cracks in the foundation or walkways?
- Does the driveway need resurfacing?
- Are the gutters, chimney, and walls in good condition?
- Do the window casings, shutters, siding or doors need painting?
- Are garbage and debris stored out of sight?
- Are lawn mowers and hoses properly stored?
- Is the garage door closed?