Selling Your Home?
Congratulations on selling your home!
One of the most common and costly mistakes I’ve seen when someone sold sells their home is believing they can use a “1031 exchange” to not report any of the profits made from selling the home.
Don’t get me wrong. You very well may not have to pay taxes on any of the profits made, BUT
1) You still have to report the sale of your home in your taxes; and
2) There are certain rules you have to pass to write off $250,000(single)/$500,000(married filing jointly) when you’re selling your home.
You cannot use a 1031 exchange for sale of your resident home.
You can read more about reporting the sale of your home here: https://www.irs.gov/taxtopics/tc701
Tax forms to gather as soon as you can:
The original escrow documents (Buyer's Settlement Statement) you received when you first bought the home you just sold.
Provide the escrow documents (Seller's Settlement Statement) you received when you sold your home.
Provide an estimated amount and description of any large improvements you made on the house prior to putting it on the market.
When did you make this improvement?
Look out for a form 1099 - S you will receive late January to early February.
Was this house used in any way to make money (e.g. short term rentals like AirBnB or VRBO) in the last 5 years?
Are you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community?
Did you make an installment sale?
If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale.
Eligibility Test for the $250,000/$500,000.
https://www.irs.gov/publications/p523#en_US_2022_publink10008937
1. Eligibility Step 1—Automatic Disqualification
Determine whether any of the automatic disqualifications apply.
Your home sale isn’t eligible for the exclusion if ANY of the following are true.
You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.
You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.
2. Eligibility Step 2—Ownership
Determine whether you meet the ownership requirement.
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
3. Eligibility Step 3—Residence
Determine whether you meet the residence requirement.
If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
If you were ever away from home, you need to determine whether that time counts toward your residence requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).
If you become physically or mentally unable to care for yourself, and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange, any time you spent living in a care facility (such as a nursing home) counts toward your 2-year residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.
4. Eligibility Step 4—Look-Back
Determine whether you meet the look-back requirement.
If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.
5. Eligibility Step 5—Exceptions to the Eligibility Test (refer to the website)
6. Eligibility Step 6—Final Determination of Eligibility
If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion. Skip to Worksheet 1, later.
If you didn’t meet the Eligibility Test, then your home isn’t eligible for the maximum exclusion, but you should continue to Does Your Home Qualify for a Partial Exclusion of Gain.
This can become very confusing and/or stressful, especially with so much going on when you’re selling and buying a home to start a new chapter in your life. Call and/or text us at 206.238.0588 or email us at Kat@theparkbooks.com.
Cheers!
TheParkBooks LLC
