The day you’ve been waiting for has finally arrived. The “for sale” sign is officially down and you have a sizable check in hand. The keys have been exchanged and you’re no longer a homeowner. Now what?
Before you take that check to the bank, it’s time to think about taxes. Selling your home carries a number of tax consequences.
Here are some important questions for your tax professional to get you started:
1. I spent a lot of money getting ready to sell my house. What can I claim as a deduction?
Chances are, you can’t deduct any of the expenses you incurred fixing up the house to make it appealing to buyers.
However, if you made any significant capital improvements, that can add to your basis for purposes of sale (see #7 below). Hold on to your receipts and ask your tax pro to make any necessary adjustments to basis.
2. I had to give a chunk of my sale to my real estate agent as a commission. Where can I write that off?
You can’t deduct commissions for the sale of a personal residence (it’s a different story for business and rental properties), but they may be added to your basis as the cost of sale. Your tax pro can help you make those adjustments.
3. What about my real estate lawyer — can I deduct those fees?
Nope. Generally, legal services are considered personal in nature and not deductible on your tax return. This is not the case, however, if you sold business and/or rental property.
4. Can I write off my tax lawyer/accountant?
Finally, some good news! You can generally deduct fees for service paid for tax advice and preparation — that includes your tax attorney and your accountant.
To claim the deduction, you must itemize your deductions and you’ll have to meet the 2% floor for miscellaneous deductions. Keep receipts and ask your tax pro whether the numbers will work for you.
5. Since I won’t own the house at tax time, can I deduct any home mortgage interest?
You can deduct the interest that you pay toward your home mortgage so long as your mortgage isn’t more than $1 million and is secured by a qualified home, meaning your main or second home.
You can deduct home mortgage interest paid during the tax year even if you sold the home during the year. Check your form 1098 issued at year-end with your tax pro to find out how much interest you actually paid.
6. My real estate taxes for the entire year were prepaid. Can I claim all of them?
You can generally deduct real estate taxes paid on the value of your property. Most real estate taxes have an early deadline (February is popular) — if you sell after that, chances are, you will have already paid.
In most cases, the buyer will reimburse you at settlement for the pro-rated share of taxes already paid. For tax purposes, you can deduct the difference between what you prepaid and what you were reimbursed.
Ask your tax pro to look over your settlement sheet and help you figure the actual deduction.
7. Do I have to pay taxes on the sales proceeds?
You owe capital gains tax on the gain attributable to your home when you sell. You can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years.
Your gain is figured based on the selling price less your basis (the cost plus those adjustments you discussed with your tax pro). Again, ask your tax pro to figure the amount for you.
8. What about that “Obamacare” tax I’ve been hearing about?
The new tax is actually a Medicare tax of 3.8% imposed on investment/unearned income for high-income taxpayers ($200,000 for individuals and $250,000 for married filing jointly). Investment income includes, for this purpose, gain from the sale of your home.
The capital gains exclusion (see #7) still applies no matter how much you earn. However, if you make over the high-income-taxpayer threshold, you have to figure your gain and subtract the exclusion amount.
If your gain is less than the exclusion amount, the Medicare tax does not apply, no matter your income. If your gain is more than the exclusion amount, the Medicare tax does apply but only on the portion of the gain that’s more than the exclusion amount.
These numbers can be complicated, so ask your tax pro to help you figure out whether the tax applies to you.
9. Can I avoid paying tax on the gain by flipping the proceeds into a new house?
No. Before 1997, you could claim an exclusion if you used the proceeds from the sale of your home to buy another house. That’s old law. Today, the IRS does not care what you do with the proceeds from the sale — but your tax pro might, so it’s worth inquiring.
10. What else do I need to know about my taxes this year?
You should always ask this question. Taxes owed are dependent on facts and circumstances. So much of your tax obligation depends on your bigger financial picture.
If you have any questions — or don’t understand something — ask your tax or real estate law professional.