Current home sale proceeds, closing costs

[maustin]

—I’m wondering about how the proceeds from the sale of my current home would be taxed

—Also can I deduct expenses for getting it ready for sale, as they are becoming substantial

—Also what portion of my closing costs on the next home purchase can I deduct? Or what about Down payment?

[dclick]

Thank you for reaching out with these excellent questions!

Your liability will be determined by the amount you sold the home for, minus any fees and expenses related to the sale, minus your basis in the home (what you originally paid for the home and any improvements).

When you make a home improvement, such as installing central air conditioning or replacing the roof, you can't deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.

This article addresses all these items and is a good reference to keep around:
https://turbotax.intuit.com/tax-tips/home-ownership/home-improvements-and-your-taxes/L6IwHGrx6 

After that, depending on your circumstances, you may be able to exclude $250,000 to $500,000 of any potential gain from income tax.

Do I have to pay taxes on the profit I made selling my home?

It depends on how long you owned and lived in the home before the sale and how much profit you made.

• If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
• If you are married and file a joint return, the tax-free amount doubles to $500,000.

The law lets you "exclude" this profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)

• You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
• If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.

 

How do I qualify for this tax break?

There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:

• Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
• Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
• Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.

If you're married and want to use the $500,000 exclusion:

• You must file a joint return.
• At least one spouse must meet the ownership requirement (owned the home for at least two years during the five years prior to the sale date).
• Both you and your spouse must have lived in the house for two of the five years leading up to the sale.

This is covered in more depth here.

To answer the final portion of your question, your down payment on the new home is not deductible.

I hope this helps!

-Dennis

[AR_CPA2]

Thanks for your question!!

Your tax liability will be determined by the amount you sold the home for, minus any fees and expenses related to the sale, minus your basis in the home (what you originally paid for the home and any improvements).

See this article below regarding the Home Improvements:

https://turbotax.intuit.com/tax-tips/home-ownership/home-improvements-and-your-taxes/L6IwHGrx6

Yes, you can deduct the expenses for getting the house ready for sale.

The closing costs on the next home purchase are not deductible but that you can add to basis of the home.  You can deduct any Mortgage Interest Paid, Points Paid, and Mortgage Insurance Paid.

[JaniceS_CPA_CFP]

Hello, 

Great questions and the answers depend on a few things. 

Regarding the proceeds from the home sale, the answer depends on if you sold the home for a gain or a loss and if the home was used as your main home or investment property.  Assuming you sold the home for a gain and if this is your personal resident, not investment property or a rental, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. 

Qualifying for the Exclusion

In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. 

If you receive a 1099-S for this transaction you should include this on your return and follow the instructions in Turbo Tax to determine if you sold the home for a gain or loss and if any part of the gain is taxable. As long as the gain is below the amounts mentioned above and you qualify for the exclusion you will not owe any taxes on the transaction. 

When you are determining your total gain or loss on the sale you can factor in capital improvements made on the home. 

• Capital improvements add value to your home, prolong its life, or give it a new or different use.
• They don't include expenses for routine maintenance and minor repairs, such as painting.
• Examples of improvements are a new roof, a remodeled kitchen, a swimming pool, or central air conditioning.
• You add these expenses to your original cost to increase your adjusted basis (which in turn decreases the amount of gain on a sale).

Closing costs that can be deducted in the year they are paid are: 

• Origination fees or points paid on the purchase
• Mortgage Insurance (PMI) 

The following  closing costs are some of the expenses that can be deducted when you sell the home and should be factored into the cost of the home when you are calculating the cost basis (price) of the home 

• Title insurance
• Recording fees 
• Title and survey fees
• Transfer fees 

Hope this helps. Turbo Tax does a great job at walking you through these calculations so don't worry if it seems like a lot.