TAX IMPLICATIONS OF SELLING A HOUSE

Article courtesy of Realtor.com

Selling your home can be an exciting and challenging experience, particularly if you’re attempting to simultaneous settle on one house and purchase another.

1040The numbers spinning through your head at this point include principal and interest payments, closing costs, down payment funds and moving costs. Unless you happen to be making this move right around April 15, when federal income taxes are on everyone’s mind, you may not have given much thought to taxes on the sale of your home. In most cases, that’s OK, because for the vast majority of people no taxes are due on a home sale.

Taxes and Home Sellers

Federal tax law allows home sellers a tax exclusion on the capital gains from the sale as long as they meet certain criteria, the most important of which is that the home must be the primary residence for at least two of the previous five years. Single taxpayers can exclude a profit of up to $250,000, and married taxpayers who file joint returns can exclude a profit of up to $500,000. You can use this exclusion more than once in your lifetime as long as you haven’t taken the exclusion within the past two years for another house.

The Internal Revenue Service spells out certain circumstances in which you can take the exclusion on your profit, even if you don’t meet the two-year requirement. If you couldn’t live in the house because you’re divorced or your spouse died, or if you were deployed overseas by the military or by the U.S. Foreign Service, you may still be able to qualify for the full exclusion.

A partial exclusion may be possible if you sold your house before two years of residency due to a job loss or transfer, illness or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

Consult with a tax professional to determine your eligibility for the exclusion.

Calculating Your Tax Bill

If you’re certain that you’re not required to pay taxes on the sale of your home because you meet the exclusion eligibility requirements, then you aren’t required to report the sale of your home on your federal tax return.

If you do have to pay taxes, you and your tax professional will need to calculate the adjusted basis of the house. The adjusted basis is the original price of your home, plus capital improvements, minus any depreciation. Capital improvements mean things like adding a deck or finishing a basement or remodeling your kitchen, not routine maintenance. Depreciation refers to tax credits you took such as for a home office, a first-time home buyer tax credit, or a credit for energy-efficient improvements.

Your taxes will be based on the calculation of the sales price of the home, minus deductible closing costs, minus your basis. Some examples of deductible closing costs include the real estate broker’s commission, title insurance, legal fees, administrative costs and any inspection fees paid by you instead of the buyer. If you made any home improvements specifically in order to sell your home, such as new landscaping or repairs or replacing the carpet in some rooms, you can deduct those costs — as long as you did them within 90 days before the sale.

You may also be able to deduct moving costs from your tax bill if you’re moving at least 50 miles because of a job change.

While these are potential tax implications of selling your home, you should always consult a tax professional to make sure you are meeting current IRS requirements.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

HOW DO I DEFER TAXES WITH AN INCOME PROPERTY EXCHANGE?

When selling a principal residence, qualified homeowners are allowed to take up to $500,000 in profits tax free. But what if you want to sell an investment property? Rather than pay taxes on profits from the sale, you can defer taxation by exchanging a qualified property for another ‘like-kind’ property. It’s called a 1031 exchange, named after Internal Revenue Code (IRC) section 1031. You may also hear it referred to as a ‘tax-deferred’ exchange.

checkbook

Here are some of the basics, but due to the complexities and possible tax consequences, be sure to consult a tax professional and/or real estate attorney before attempting to execute a 1031 exchange.

CAN I SIMPLY SELL ONE PROPERTY AND SELL ANOTHER?
No. To reap the tax break, there must be an exchange, not just a sale and purchase of otherwise qualified properties. The exchange must be properly executed through an exchange agreement serviced by a ‘qualified intermediary’ and according to a specific process and timetable defined by the tax code.

WHAT IS A QUALIFIED INTERMEDIARY?
Sometimes called a ‘facilitator’, a qualified intermediary functions as a middleman. Because you are not allowed to take physical possession of the proceeds of the sale of your old property, the QI holds all the cash from the exchange until it is transferred to the seller of the replacement property. The QI also facilitates the acquisition and transfer and must be an independent third party to the exchange.

WHAT TYPES OF PROPERTY CAN BE EXCHANGED?
Real estate qualified for a tax deferred exchange includes improved or unimproved property held for income, investment or business purposes. Both the old property and the new property would have to fall within that definition.

CAN I TAKE SOME MONEY OUT OF THE TRANSACTION BY INVESTING IN A PROPERTY OF LOWER VALUE?
To have a valid tax deferred exchange, you must exchange the old property for a property of equal or greater value. It at the conclusion of the transaction you receive any cash, cash equivalents or non-like-kind property, you will owe capital gains taxes.

IS THERE MORE THAN ONE WAY TO STRUCTURE A 1031 EXCHANGE?
There are four basic types of property exchanges, each conducted according to timetables and rules outlined by IRC and Treasury regulations.
Simultaneous Exchanges occur when both properties go to closing on the same day.
Delay Exchange Settlements have different closing dates but strict timing requirements must be adhered to and you must close on or formally identify a replacement property within 45 calendar days of closing on the old property.
Reverse Exchanges happen when your replacement property is closed on before you find a buyer for your relinquished property.
Improvement Exchanges are when you make improvements to a new or existing replacement property, investing the exchange proceeds.

Again, contact your qualified tax and legal advistors for all the details.

CAN A REAL ESTATE PRO HELP ME CONDUCT A 1031 EXCHANGE?
A real estate professional who has served you professionally within the two years prior to the exchange agreement is disqualified from serving as the QI in your exchange. But a real estate pro can be invaluable in helping identify buyers for the property you want to sell and in helping you locate qualified like-kind replacement property.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

LEARN HOW EASY IT IS TO APPEAL YOUR TAXES

Most of us believe our property taxes are just too high and wonder if there is anything that can be done to get a reduction. The answer to that may be “Yes”. Find out if your assessment fairly represents your home’s value by attending the TAX APPEAL SEMINAR at New Horizons School of Real Estate located at 10 Sycamore Avenue, Suite 1B (side entrance), Ho-Ho-Kus, NJ, on Wednesday, February 27, 2013 at 7:00-9:00 pm.

tax appeal
Sponsored by Abbott & Caserta Realtors and Martin Sharit, Esq., an attorney who specializes in tax appeals, this seminar will provide you with all the tools and information you will need to determine if you are eligible for the appeals process.

For more information or to sign up for this free, educational seminar, please RSVP to Amy Morrison at 201-388-0581 no later than February 25th.

 

Date: Wed., February 27th, 2013

Time: 7:00 PM to 9:00 PM

Place: New Horizons School of Real Estate
10 Sycamore Aveue
Suite 1B (Side Entrance)
Ho-Ho-Kus, NJ 07423

RSVP: Amy Morrison
201-388-0581 (Cell)
201-891-2223×122 (Office)

Facebooktwittergoogle_plusredditpinterestlinkedinmail