Where are Uncle Sam’s hands when you sell your house?
The IRS’s hands are not necessarily in your pockets, but with the return of the real estate market – and it’s certainly returned here in South West Florida – I thought it would be a good time to get you thinking about taxes when you sell. Real Estate sales transaction for residential primary owners is still one area the Federal Government is still largely hands off; but there are still some things you need to know.
Keep in mind I am talking about primary residences (a home you declare as your domicile and in which you live most of the time), second homes or investment property are treated differently. (If you have detailed questions about taxes and the law – please consult a tax or legal professional – I am certainly not one, but I can make some recommendations for you if you wish.)
Principal Residence The government defines a principle residence as one in which you have lived for at least two years of the previous five. (It can be a house, Condo, Boat, or Mobile home – as long as it has sleeping, eating, and toilet facilities) ( See IRS Publication 523 for a full discussion of what classifies as a principal residence).
The IRS give a tax break when you sell your previous residence and allows profits (gain) to be tax free – up to $500,000 for a married couple or surviving spouse up two years after the spouses death, and $250,000 for singles. Keep in mind this is the PROFIT, so if you bought a house for $200,000, put $100,000 in improvements and then sold it as a couple and netted $800,000 after sales commissions and cost to ready the house for sale, there would be no tax. You can do this every two years, by the way.
Even if you are not selling your home anytime soon, it’s an excellent idea to keep records of any improvements you make to your house that will increase its cost basis. Things like a buried a propane tank and permanent generator, a new roof, a room addition, a new kitchen, new windows, and permanent landscaping will most likely qualify.
Maintenance items like new paint and carpet will not add to your adjusted cost basis, but if done and paid for just prior to the sale, the expense may reduce your effective gain on the sale.
My advice is to keep records, and if you are in doubt on how to classify an expense consult a tax expert.
Forgiven Debt and Short Sales. Normally if you sell your home “short” of the amount owed you would be taxed on the portion of the debt that was forgiven. But for a principal residence, the IRS will allow up to $2,000,000 in forgiven debt to be tax free. This law is scheduled to be retired at the end of 2013 (it got an extension from 2012, and this may well happen again – but maybe not). So if you are going to short sale your home, you should start working on it now to get it sold before the end of the year (Primer on Short Sales Here). I would be happy to help you with this, just drop me an email.
What about the new 3.8 tax? A while ago I wrote a full article on the 3.8% tax (you can read it here). This is a new tax on investment income that took effect this year. This tax may take effect on some principal home sales if you exceed the allowable exemption from the tax on gains (over the $500,000 for couples, for example). It will not apply to most sellers. Click the above article if you think it might.
Special Cases. The calculations get a bit more complicated if you rented out a portion of your home or took a depreciation deduction of an in-home office. You will have to recapture the depreciation and prorate the square footage between the home office and the residential portion.
By the way, Florida has no income tax. Here is a list by state
For Commercial Property you should know 1031 tax rules
For Foreigners there are some things you should know as well – Click here
As usual, if I can help with advice or real estate services, please contact me or one of our team.
We are filming a new series of videos about Fort Myers. Here is one of the new ones: Fort Myers Gregg Fous. Enjoy.