Taxes and Home Selling
May 21, 2009 – 11:52 amWelcome back!
If you sell your home at a taxable profit or a loss, the sale must be reported to the Internal Revenue Service. Your lender will report the transaction by filling Form 1099 with the IRS. And as the seller, you must report the sale by filling Form 2119 with the IRS and showing the gain or loss on Schedule D of your federal tax return; if the gain is tax-free, you need not file this form. To help you wade through these forms and procedures, call the IRS at 800-829-3676 and ask for a copy of Publication 523: Tax Information on Selling Your House.
While the federal government may be interested in taxing your capital gain on the house, you won’t be expected simply to subtract the sale price from your original purchase price and consider that the taxable gain, before figuring whether you’ll qualify for the new exclusion. In one of its rate shows of magnanimity, the tax code lets you add to the original purchase price a bunch of costs you paid during the time you lived in the house. You can tack on only the costs for actual improvements, such as replacing the roof, installing central air-conditioning, or adding a bathroom. Basic maintenance and repairs such as cleaning the gutters or painting the exterior are not considered to be improvements. In addition to the cost of improvements, you’ll also be able to add on a variety of fees you paid in the process of selling the home, such as the sales commission you paid to the agent. The sum of all additional costs are added to the original purchase price, and the total is called the adjusted cost basis. You subtract this final adjusted cost basis from the sale price to determine any capital gain. Below, a worksheet to help:
DETERMINING YOUR TAXABLE GAIN OR LOSS
1. Price you paid for the house $______________
(If you inherited the house, use the appraised
value of the house at the time of the inheritance,
known as the stepped-up basis)
2. Price of improvements
___________________________________ $______________
___________________________________ $______________
___________________________________ $______________
___________________________________ $______________
___________________________________ $______________
___________________________________ $______________
TOTAL COST OF IMPROVEMENTS $______________
3. Add Line 1 and total from Line 2 $______________
4. Your selling expenses:
Real estate agent commission $______________
Points you paid for the buyer $______________
Legal $______________
Advertising expenses $______________ TOTAL $______________
5. Add Line 3 and total from Line 4 $______________
6. Value of energy credits you received $______________
Value of insurance losses deducted $____________
Deferred capital gain from previous sale(s) $______________
TOTAL $______________
7. Subtract Line 6 from Line 5 $______________
(YOUR ADJUSTED COST BASIS)
8. Subtract Line 7 from your sale price $______________
YOUR CAPITAL GAIN (OR LOSS) BEFORE FACTORING
IN THE $250,000 OR 500,000 EXCLUSION
If you work out of your home, you need to have your accountant or tax preparer help you with this next exclusion, since only the portion of the house that was used solely for residential purposes can deferred. You must add to your gain amounts you depreciated for your home office. And that total is subject to a 25% “depreciation recapture” tax.
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