Marc A. Hebert's Money Sense: Will you owe income taxes after selling a home? It depends
I'VE JUST SOLD my personal residence. Will there be taxes to pay?
As with most things tax-related, the answer is, it depends. First, let's look at whether you made money on the sale.
The starting point to this calculation is the original cost basis. For most people, this is the amount you paid for your home. If you bought the home from another person, make sure to look at your closing statement. Certain settlement and closing costs also count as part of the cost basis. This doesn't include things that are personal or routine expenses, such as the proration of homeowner's association dues.
Other situations have a different way of arriving at the original cost basis. These include a home you inherited, was given to you as a gift, one you built, or one where you filed Form 2119 to postpone gain on a previous sale.
To determine basis, start with the original purchase price, then you add the cost of any improvements you made to the home. These are generally things that prolonged its useful life or gave it a new or different use, like remodeling a kitchen, for example. Again, don't include the routine, maintenance items.
From the resulting cost basis number, you subtract settlement or closing costs. You probably also paid real estate commissions. Items that represent the cost of selling the home are subtracted.
Subtract the final adjusted cost basis number from the selling price to determine your gain or loss.
If the result is a loss, you can do nothing further. A loss is considered a personal item and cannot be deducted.
On the other hand, a gain is potentially taxable, however, an exclusion might be available to help you avoid paying tax.
The gain falls into the exclusion category when, as a single taxpayer, you owned and used the home as a principal residence for a total of two out of the five years before the sale (the two years do not have to be consecutive). If this is the case, you may be able to exclude from your federal income taxes $250,000 of the gain. If you are married, filing jointly, the exclusion increases to $500,000. In the case of a married couple, only one spouse has to have met the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.
The exclusion applies to both single and married filers if you haven't claimed the exclusion on another home in the last two years. You may qualify for a partial exclusion if the change in residence is due to a change in employment, health reasons, or certain other unforeseen circumstances.
The exclusion does not apply to vacation homes and pure investment properties.
Special situations may alter the outcome. Some of these include:
. You sell vacant land adjacent to your home;
. Your home is owned by a certain type of trust;
. Your residence contained a home office or was otherwise used for business purposes;
. You rented part of your home to tenants;
. You owned your home jointly with an unmarried taxpayer;
. You sold your home within two years of your spouse's death;
. You are a member of the uniformed services;
. You are divorced and the home is part of a settlement
This represents just the basic information on this subject. For more details see the IRS website, www.IRS.gov, for Tax Topic 703: Basis of Assets, Publication 523: Selling Your Home, and Tax Topic 701: Sale of Your Home. We also suggest you consult your tax adviser.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.