Selling your home

06 Dec, 2015 TAX LAW 0

Chapter 15
Selling your home

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Introduction

Your home is likely to be the most valuable asset you own and may increase in value as the housing recovery continues. If you’ve owned your home for a number of years or live in an area where home values have rebounded, you may have a significant gain—and lots of taxes to pay—when you sell it. On the other hand, the value of your home may still be much less than you paid for it. As a result, you may find yourself selling your home at a loss. Unfortunately, a loss on the sale of your personal home is generally not deductible. This chapter tells you what you should and shouldn’t do when you’re considering selling your home.

Your home is probably your best tax shelter. Homeowners are eligible for a number of tax breaks. You may deduct the cost of real estate taxes and, subject to certain limitations, the cost of interest paid on your mortgage. (See chapter 24, Interest expense, for an explanation of the limitations on deducting home mortgage interest.) You may also be able to completely exclude up to $250,000 of gain ($500,000 if you’re married filing jointly) on the sale of your home if you meet certain conditions. In addition, you may qualify for the residential energy efficient property credit for making energy-efficient improvements to your home. (See chapter 37, Other credits including the earned income credit, for more information.) In addition to federal tax benefits, some states continue to allow local residential energy conservation and solar energy tax credits against your state income tax liability. Refer to your state’s tax return instruction guide to determine if state tax credits are available.

Any gain you are required to recognize on the sale of a home will be treated as long-term capital gain if the home was held for more than one year. The tax rate applied to long-term capital gains depends on your marginal tax bracket. In 2014, net long-term capital gains are taxed at a maximum rate of 20% for high income taxpayers who are otherwise in the 39.6% ordinary income tax bracket (i.e., taxable incomes over $406,750 for individual filers, $432,200 for heads of households, $457,600 married filing jointly, and $228,800 if married filing separately). Net long-term capital gains received by taxpayers in the 10% and 15% ordinary income tax brackets are taxed at a zero rate. For all others, (i.e., taxpayers in the 25%, 28%, 33%, or 35% ordinary income tax brackets) net long-term capital gains are taxed at 15%. These lower rates apply to both the regular tax and the alternative minimum tax.

In addition to paying regular income tax or alternative minimum tax on capital gains, the 3.8% Net Investment Income Tax (NIIT) is assessed on unearned Net Investment Income (NII). For individuals, the NIIT is 3.8% of the lesser of: (1) NII or (2) the excess of modified adjusted gross income (MAGI) over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately). Generally, NII includes both short- and long-term capital gains, including taxable gains from the sale of residential and investment real estate. To the extent any gain you realize from the sale of your main home is eligible to be excluded from your gross income—see Excluding the Gain, later in this chapter—the excluded gain is also not subject to the 3.8% NIIT.

Reminder

Home sold with undeducted points. If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. See Mortgage ending early under Points in chapter 24.

This chapter explains the tax rules that apply when you sell your main home. In most cases, your main home is the one in which you live most of the time.

If you sold your main home in 2014, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). See Excluding the Gain, later. Generally, if you can exclude all the gain, you do not need to report the sale on your tax return.

If you have gain that cannot be excluded, it is taxable. Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). You may also have to complete Form 4797, Sales of Business Property. See Reporting the Sale, later.

If you have a loss on the sale, you generally cannot deduct it on your return. However, you may need to report it. See Reporting the Sale, later.

The following are main topics in this chapter.

Figuring gain or loss.
Basis.
Excluding the gain.
Ownership and use tests.
Reporting the sale.

Other topics include the following.

Business use or rental of home.
Recapturing a federal mortgage subsidy.

Useful Items

You may want to see:

Publication

523 Selling Your Home
530 Tax Information for Homeowners
547 Casualties, Disasters, and Thefts

Form (and Instructions)

Schedule D (Form 1040) Capital Gains and Losses
982 Reduction of Tax Attributes Due to Discharge of Indebtedness
8828 Recapture of Federal Mortgage Subsidy
8949 Sales and Other Dispositions of Capital Assets

Main Home

This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:

House,
Houseboat,
Mobile home,
Cooperative apartment, or
Condominium.

To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale.

Land. If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. See Vacant land under Main Home in Publication 523 for more information.

Example. You buy a piece of land and move your main home to it. Then you sell the land on which your main home was located. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.

More than one home. If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income gain from the sale of any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year.

Example 1. You own two homes, one in New York and one in Florida. From 2010 through 2014, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. In the absence of facts and circumstances indicating otherwise, the New York home is your main home. You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2014.

Example 2. You own a house, but you live in another house that you rent. The rented house is your main home.

EXPLANATION

If you own more than one property, it is important to determine which is your principal, or main, residence. The IRS will not issue a ruling on whether or not a home qualifies as a principal residence. The gain on the sale of your principal residence may be excluded, but the gain on the sale of your nonprincipal residence or rental property is taxed in the year of the sale.

If you use more than one property as a residence, the determination of which property is your principal residence will be based on all the facts and circumstances. The IRS has said that if you alternate between two properties, the one you use for a majority of time during the year will ordinarily be considered your principal residence. However, regulations indicate that other factors are also relevant in determining which property is your principal residence. Those factors include:

Where you vote,
The address you use on your tax returns,
The address you claim to be your residence in other financial dealings,
Where your children go to school,
Where you work,
Where your car is registered,
Where you belong to social and religious groups.

That the property is currently rented or has been rented in the past does not mean that you may not consider it to be your principal residence. For example, a property that is rented out for a brief period while you are away or while you are trying to sell it should not affect the property’s status as your principal residence. In order to exclude the gain, the home’s status as your principal residence at the time of sale is no longer relevant as long as it was your principal residence for 2 of the 5 years prior to the date of sale.

Example 3. You own two homes, one in Virginia and one in New Hampshire. In 2010 and 2011, you lived in the Virginia home. In 2012 and 2013, you lived in the New Hampshire home. In 2014, you lived again in the Virginia home. Your main home in 2010, 2011, and 2014 is the Virginia home. Your main home in 2012 and 2013 is the New Hampshire home. You would be eligible to exclude gain from the sale of either home (but not both) in 2014.

Property used partly as your main home. If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. For details, see Business Use or Rental of Home, later.

Figuring Gain or Loss

To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Subtract the adjusted basis from the amount realized to get your gain or loss.

Selling Price

The selling price is the total amount you receive for your home. It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale.

Payment by employer. You may have to sell your home because of a job transfer. If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7.

Option to buy. If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Report this amount on Form 1040, line 21.

Form 1099-S. If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home.

However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.

Amount Realized

The amount realized is the selling price minus selling expenses.

Selling expenses. Selling expenses include:

Commissions,
Advertising fees,
Legal fees, and
Loan charges paid by the seller, such as loan placement fees or “points.”

Adjusted Basis

While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home’s adjusted basis, see Determining Basis, later.

Amount of Gain or Loss

To figure the amount of gain or loss, compare the amount realized to the adjusted basis.

Gain on sale. If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable.

Loss on sale. If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home cannot be deducted.

TAXSAVER

Loss on sale of a house held for investment. While you cannot deduct a loss on the sale of your personal home, you may be able to deduct a loss realized on the sale of a house you own as an investment (and do not use for personal purposes).

Explanation

If you convert your residence to rental property, your basis for purposes of calculating depreciation and a loss on the sale is limited to the lower of your adjusted basis or the value of the residence on the date of conversion. Your basis, however, for calculating a gain is your adjusted basis less allowable depreciation.

Example

Assume you have a residence with a basis of $150,000, which you convert to business use when its fair market value is $125,000. You would use $125,000 as your basis for calculating depreciation (i.e., the lesser of the adjusted basis or the fair market value on the date of conversion). If you subsequently sold the residence for $130,000 after having deducted $4,000 for depreciation, your adjusted basis for determining whether you realized a loss would be $121,000 ($125,000 − $4,000), and your adjusted basis for determining whether you realized a gain would be $146,000 ($150,000 − $4,000). In this situation, you would not recognize a gain or loss because a loss results on the gain calculation and a gain results on the loss calculation.

	Gain Calculation	Loss Calculation
Selling price	$130,000	$130,000
Less:
Adjusted basis	146,000	121,000
Gain/(loss)	($16,000)	$9,000

Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer.

Separate returns. If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is generally determined by state law.

Joint owners not married. If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Each of you applies the rules discussed in this chapter on an individual basis.

Dispositions Other Than Sales

Some special rules apply to other dispositions of your main home.

Foreclosure or repossession. If your home was foreclosed on or repossessed, you have a disposition. See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss.

Abandonment. If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss.

TAXALERT

Mortgage debt forgiveness. From 2007 through 2013, taxpayers may have been able to exclude from gross income the income realized from the forgiveness or cancellation of up to $2 million ($1 million if married filing separately) of “qualified principal residence indebtedness.”

As of the date this book was published, this exclusion is not available after 2013. While Congress had been considering legislation that would extend its availability at least through 2015, no such extension had yet been passed. The discussion of mortgage debt forgiveness is included in this chapter in case Congress acts to extend it. For updated information on this and any other tax law changes that occur after this book was published, see our website, ey.com/EYTaxGuide.

Qualified principal residence indebtedness is up to $2 million ($1 million if married filing separately) in acquisition indebtedness secured by the taxpayer’s principal residence. Acquisition indebtedness is generally defined as debt you incurred to acquire, construct, or make substantial improvements to your principal residence and such debt is secured by that residence. It also includes refinancing of such acquisition indebtedness to the extent the balance of the new loan does not exceed the amount of the refinanced acquisition debt.

The amount of any discharged debt you can exclude from your income reduces the basis in your principal residence. That will increase the amount of gain (or decrease any loss) you realize when you ultimately sell your home.

Example

Joe purchased his home for $300,000 with 100% financing. A few years later, his employer had significant layoffs and Joe lost his job. By the time Joe was laid off, the value of his principal home had also dropped significantly. Due to Joe’s financial condition and the depressed value of the home, his lender decided to reduce the outstanding balance on the mortgage to $200,000. If this loan forgiveness had occurred between 2007 and 2013, Joe can exclude the $100,000 from his income, he would file Form 982 and record an adjustment to his basis in the home. His basis in the home following the debt forgiveness would be $200,000.

Trading (exchanging) homes. If you trade your old home for another home, treat the trade as a sale and a purchase.

Example. You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000).

If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed).

Transfer to spouse. If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. This is true even if you receive cash or other consideration for the home. As a result, the rules in this chapter do not apply.

More information. If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals.

Involuntary conversion. You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations.

Determining Basis

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Tags: EY Tax Guide 2015