When you sell your home, you need to consider how long you owned and lived in the house before sale and how much profit you made. If you owned and lived in the place for at least two of the five years before sale, then up to $250,000 of the profit is tax free. If you happen to be married and file a joint return (has to be joint return), the tax free amount will be $500,000. Sadly, if you take a loss from selling a house, there are no deduction for that loss.
It’s not as simple as I bought it for 100,000 and sold it for 400,000, so I’m only 50,000 over. Your gain is calculated by the (selling price) – (deductible closing costs+selling costs+tax basis in the property)
Your basis is (original purchase price + purchase expenses + the cost of capital improvements – depreciation (I went over depreciation in my article before, this is very good) – casualty losses or insurance payments.
This is the reason why most people ask for receipts and save it in a file (it’s not an old people thing guys). Save receipts from broker’s commissions, title insurance, legal fees, advertisement costs, escrow fees, inspection fees, and more just in case you get audited.
Ensure that you can prove you owned the home for at least two years during the five years prior to the date of your sale. This doesn’t have to be continuous, as long as you owned it for 730 days within the 5 years. Make sure that you used the home as your primary residence for the two years and you don’t have any other sale for another home within two years prior to the sale (basically, you can’t sell back to back). You can exempt yourself from the first one if you plan to buy a new house and use on the next home you sell. Basically, if you only profit 50,000, exempt yourself for the next one when you will make 200,000 profit (only if you have more than 1 primary house).
If you happen to acquire the ownership of the house as a divorce settlement or your spouse dies (you lived separately), then as long as your former spouse meet all the qualification, you pass as well and will benefit from this tax break. Now, if you have to move into a nursing home, then you only need to meet 1 of 5 years. Also, if you are in the military, you can meet the two year use test even if you didn’t live in it for two years due to your service. Foreign Service and intelligence agencies also get the same benefit if they reside under government orders in government housing or is in a duty station at least 50 miles away from main home.
There are much more information about this, but it’s something people should know before buying a house. Accountant may do the actual paperwork and the math, but it’s up to the tax payers to know their information.