Seven Things you Should Know When Selling Your Home

People who sell their home may be able to exclude the gain from their income. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you “exclude” this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can’t take a deduction for that loss.)

 

Seven Things you Should Know When Selling Your Home

Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

 

Here are seven things every homeowner should know if they sold, or plan to sell their house.

  1. Amount of exclusion. When you have gain from the sale of your home, you may be able to exclude up to $250,000 of the gain from your income. For most taxpayers filing a joint return, the exclusion amount is $500,000.
  2. Ownership test. To claim the exclusion you must have owned the home for at least two years during the five year period ending on the date of the sale.
  3. Use test. You also must have lived in the house and used it as your main home for at least two years during the five year period ending on the date of the sale.
  4. When not to report. If you are able to exclude all of the gain from the sale of your home, you do not need to report the sale on your federal income tax return.
  5. Reporting taxable gain. If you have gain which cannot be excluded, it is taxable and must be reported on your tax return using Schedule D. Deducting a loss. You cannot deduct a loss from the sale of your home.
  6. Rules for multiple homes. If you have more than one home, you may only exclude gain from the sale of your main home and must pay tax on the gain resulting from the sale of any other home. Your main home is generally the one you live in most of the time.

For more information see IRS Publication 523, Selling Your Home below, or by calling 800-TAX-FORM (800-829-3676). Remember, when you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.

 

Additional IRS Resources on Selling Your Home:

  • Publication 5152: Report changes to the Marketplace as they happen  English | Spanish

 

IRS YouTube Videos on the Tax Consequences of Selling your Home:

IRS Podcasts on Selling Your Home:

Quick Tax Facts About Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss.

Do you have questions about reporting gains and losses on your tax return?

Additional information on capital gains and losses is available in Publication 550Investment Income and Expenses, and Publication 544,Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523Selling Your Home

 

Here are some facts from the IRS about Capital Gains and Losses:

  • Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
  • When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.
  • You must report all capital gains.
  • You may deduct capital losses only on investment property, not on property held for personal use.
  • Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
  • Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss. Net short-term capital gains are subject to taxation at your ordinary income tax rate.
  • The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates.
  • If your capital losses exceed your capital gains, the excess can be deducted on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
  • If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
  • Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

Quick Tax Facts About Capital Gains and Losses

Capital gains rates are designed to encourage long-term investing. Most people can get a significant advantage from holding stock investments for more than one year:

 

Tax Bracket Capital Gain Tax Rate
Short Term Long Term
10% 10% 0%
15% 15%
25% 25% 15%
28% 28%
33% 33%
35% 35%
39.6% 39.6% 20%

Short term gains on stock investments are taxed at your regular tax rate; long term gains are taxed at 15% for most tax brackets, and zero for the lowest two.

For more information about reporting capital gains and losses, get Publication 17, Your Federal Income Tax, and Publication 550, Investment Income and Expenses, available below or by calling 800-TAX-FORM (800-829-3676).

 

Links related to reporting Capital Gains and Losses:

Publication 17, Your Federal Income Tax

Publication 550, Investment Income and Expenses (PDF 516K)

Seven Facts to Help You Understand the Alternative Minimum Tax AMT

Individuals with a higher income may be subject to the Alternative Minimum Tax. Under the tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount. The AMT system comes with a completely different set of rates and deduction rules. People pay it only if their AMT tax amount is higher than their traditional taxes. Translation: If you’re paying the AMT, you are by definition paying higher taxes.

The fiscal cliff deal also raised tax rates for higher-income earners. Couples making more than $450,000 a year and singles earning $400,000 or more now face a “marginal rate” of 39.6 percent rather than 35 percent on income above those levels. Because the maximum AMT rate is 28 percent, these well-to-do taxpayers will typically be charged more on their regular returns so they won’t face the AMT.

 

  1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. The Alternative Minimum Tax attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.
  2. Congress created the AMT in 1969, targeting a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax.
  3. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
  4. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
  5. The AMT exemption amounts are set by law for each filing status.
  6. For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels:
    • $69,950 for a married couple filing a joint return and qualifying widows and widowers
    • $46,200 for singles and heads of household
    • $34,975 for a married person filing separately
  7. Taxpayers may find more information about the Alternative Minimum Tax and how it impacts them by referring to IRS Form 6251, Alternative Minimum Tax Individuals, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Even if you’ve been paying the reviled alternative minimum tax known as the AMT for years, your status can change. It all hinges on how much you make, where your money comes from and the deductions you can claim.

 

Seven Facts to Help You Understand the Alternative Minimum Tax AMT

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