Selling a home can have a huge impact on one’s federal taxes returns. While selling a home can be an exciting moment, it takes a lot of effort. When selling a home there are so many variables that will affect ones federal taxes, that is why it is important for an individual to consult with a tax professional to understand how there federal taxes will be affected by the sale. Some of the variables that will affect an individuals federal taxes after selling a home will include;
1. How was the home acquired originally, was it purchased or it was passed on as an inheritance or a gift?
2. What was the home used for? was it used for business partially or rental?
3. What will be the costs and expenses for selling
4. Were there any home improvements made on the home which can be used to offset capital gains?
5. Is there any gain from the sale of the home on which taxes were not paid or postponed?
When selling a home one has to understand that a loss cannot deducted from the sale of their main home. If one sells their main home, there are allowed to exclude $250,000 of gain and if married the figure is $500,000 where the couple is filing in tax for marrieds. But this exclusion is only allowed each time one sells their main home, but not more than once every two years.
For one to be eligible for this exclusion, their home must have been owned by them and used as their main home for a period of not less than 2 years out of the 5 years prior to the sale of the home. For marrieds if they file a joint return for the year of the sale, then they can exclude the gain if they qualify for the exclusion. But this is only applicable if they both meet the use to test claim of the $500,000 maximum amount.
When one can exclude all the gain from the sale of their home, then they don’t have to report any of that gain on their federal taxes returns. If one can exclude all the gain from the sale of their home, in this case they should use Schedule D, Capital Gains or Losses, on form 1040 to report it.
If one does not meet the ownership and use tests conditions, or if during the 2 year period ending on the date of the sale of the home or exchange, they sold or exchanged another home at a gain and excluded, a portion of the gain realized on the sale or exchange of the home. If they sold their home due to health, a change in employment or certain unforeseen circumstances. The unforeseen circumstances include divorce,legal separation, natural or man-made disaster that led to damage to the home, or involuntary changes made to the home. All these factors will affect the federal taxes for any individual selling their home.