Have you recently sold your home in this hot market and wondered, “Am I going to be taxed on this sale?”
After each and every home sale, a 1099-S is issued to the seller, letting them know the final price of the sale; what most people don’t realize is the profit on that sale is taxable. Now don’t fret just yet, because there is a simple fix that you may not be doing that can allow you to offset that income to reduce or negate the taxes due.
The most common tool is the principal residence exclusion. Under this rule, sellers can exclude up to $250,000 if single or $500,000 if married filing joint of the profit from their income. To qualify for this exclusion, you must pass two tests; the first is the homeownership test, and the second is the use test. If you owned the home for at least 24 months (2 years) out of the last five years leading up to the date of sale (date of the closing), you pass the ownership requirement.
You pass the use test if you owned the home and used it as your main home for at least 24 months of the previous five years; you meet the use requirement. The 24 months of residence can fall anywhere within the 5-year period, meaning it doesn’t have to be a single block of time. What constitutes a “main home” is important if you’re splitting your time between different properties and should be examined before a sale.
If you meet these two requirements, you may exclude a portion, if not all, of your profit from your taxable income for that year. As with all things in the law, there are exemptions that are fairly complicated. If you find yourself in the situation and need guidance, reach out to the experts at the Lamarre Law Group, P. A., to help maximize your savings.