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You Got This Weekly Series: Do I Have to Pay Capital Gains Tax on the Sale of My Home?

You Got This - TaxACT

Each week we will answer one of the most frequently asked questions on FacebookTwitter and TaxACT’s Blog in the “You Got This” Weekly Series.

Question:

I have used TaxACT for five years and prepaid for 2013 taxes. I live on a fixed income (Social Security/Disability) and had to sell my home or it would have been foreclosed on. I did come away with about $40,000 at closing, which I used to buy a car and paid off bills. Will I have to pay capital gains tax on the sale of my home? I am now renting.

Nancy via Facebook

Answer:

Whether or not the sale of your home needs to be reported on your tax return depends on a few factors.

Did you receive Form 1099-S?

The first thing to consider is whether or not you received a Form 1099-S reporting the proceeds you received from the sale of your main home.

If you received a Form 1099-S, the transaction needs to be reported on your tax return, but that does not necessarily mean you have a taxable gain to report as income.

If you did not receive a Form 1099-S for this transaction, you will need to determine if any taxable gain applies. If a gain applies, you will then report the transaction on your tax return.

Does a capital gain apply to your sale?

You need to determine if a taxable gain applies to your sale. The IRS allows a gain of up to $250,000 ($500,000 if filing a joint return) on the sale of your main home to be excluded from income.

To qualify for the maximum exclusion amount, you need to meet both the ownership and use tests.

If you do not meet the ownership and use tests, you may still qualify to exclude a portion of the gain on the sale of your main home.

The ownership and use tests apply to a 5-year period ending on the date of sale.

  • To meet the ownership test, you must have owned the home for at least 2 years in that 5-year period.
  • The use test is met if you lived in the home as your main home for at least 2 years.

The ownership and use test do not have to be met using the same 2-year period. Also, these 2-year periods do not need to be continuous.

Each test simply needs to be met at some point during the 5-year period ending on the date of sale.

If you meet both the ownership and use tests, you qualify to exclude up to $250,000 of gain income from the sale of your main home.

If you are filing a joint return and both spouses meet the ownership and use tests, you qualify to exclude up to $500,000 of gain income from the sale of your main home.

If you do not meet the ownership and use tests, or if filing jointly and both spouses do not meet both tests, you may still qualify to exclude part of your gain.

Do you qualify to exclude a portion of the gain?

If you qualify to exclude a portion of the gain, this exclusion amount will be accounted for on Form 8949 using an adjustment code and adjustment amount.

Your sale will be reported like a normal transaction with your sale proceeds and cost basis reported based upon your records.

Generally, a capital gain is determined by subtracting the cost basis from your sale proceeds. If the result is a positive number, you have a gain, and if it’s a negative number, you have a loss.

When you qualify for exclusion on the sale of your main home, the amount that qualifies for exclusion will be reported as an adjustment amount

This adjustment amount is then taken into account to determine your overall gain (if any) on the sale of your main home. The overall gain is then reported on Schedule D as capital gain income.

Example:

Jerry is a single filer who sold his main home in 2013. Jerry owned this home for 7 years prior to the sale (ownership test) and occupied the home as his main home for all 7 years (use test).

Jerry purchased the home for $125,000 and sold the home for $200,000. Normally this would generate a gain of $75,000 but since Jerry meets both the ownership and use tests, he qualifies to exclude up to $250,000 of gain on this sale.

Therefore, Jerry does not have a taxable gain on the sale of his main home and is not be required to report the transaction on his tax return.

However, Jerry received a Form 1099-S reporting sales proceeds of $200,000. Jerry enters this transaction into his TaxACT return and it will be reported on Form 8949.

Since he qualifies for an exclusion, TaxACT enters an adjustment amount of $75,000 on Form 8949 for this transaction, giving Jerry a net gain of $0 on this transaction.

If Jerry did NOT receive a Form 1099-S for this transaction, he would not be required to report the transaction on his tax return.

However, if Jerry chooses to report the transaction on his return, the exclusion amount will still be reported.

TaxACT will guide you step-by-step through reporting the sale of your main home on your taxes and will answer any questions along the way.

The maximum exclusion allowed by the IRS only applies to the sale of your main home.

If you sold a vacation home, second home, or any other home that is NOT your main home, you will need to report the entire gain as capital gain income on your tax return.

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