The housing market is hot, and this tax season, you’re likely to have several clients who have sold a home at a gain. To make sure you’re ready to answer their questions, here’s everything tax professionals should know about the tax implications of selling a house.
Do you pay taxes when you sell a house?
In most cases, homeowners do not have to pay taxes on profits from the sale of their home. Although capital gains from selling an asset are usually taxable, the sale of a house is one notable exception.
Capital gains from the sale of a house are not considered taxable if they are under $250,000 (or $500,000 for married filing jointly) and if the homeowner lived in the house as their primary residence for at least two of the last five years before the sale. If they have already profited from the sale of another house within the previous two years and used the capital gains exclusion, they are generally not allowed to use it again for the current sale.
A few other rare factors can affect their eligibility for the capital gains exclusion as well. If there’s any doubt, you can help your clients confirm whether or not they qualify using the IRS’s simple Eligibility Test. If they don’t pass the eligibility test, they may still qualify for a partial capital gains deduction if they moved for work-related reasons, health-related reasons, or due to unforeseeable events (such as the death of a spouse or the birth of multiples).
If you’re unsure of your clients’ exact standing, the worksheets in IRS Publication 523 can help you determine their capital gains exclusion limit, figure their gains or losses, and determine if they have any taxable gain.
What if the home sells at a loss?
In the current market, selling a home at a loss isn’t common. Still, if it happens, your client may wonder if they can deduct the loss. Unfortunately, the answer is no if the home was their primary residence. If the home was a rental or investment property, however, they can usually deduct the loss.
What are other tax benefits of owning a home?
Owning a home comes with a few tax deductions as well, but most taxpayers won’t see the benefits unless they itemize deductions.
Mortgage interest tax deduction
Taxpayers can deduct all or most of the interest they paid on their home (on up to $750,000 of mortgage debt).
Property tax deduction
They can also deduct property taxes paid on their home but only up to a certain amount. The Tax Cuts and Jobs Act reduced this deduction to $5,000 total in state and local taxes ($10,000 for married filing jointly). So if a client who is filing jointly paid $6,000 in property taxes and $5,000 in other state and local taxes, they’ll still only be able to deduct $10,000.
Unfortunately, both the mortgage interest tax deduction and the property tax deduction only benefit taxpayers who itemize deductions. Since the Tax Cuts and Jobs Act increased the standard deduction, only around 10% of taxpayers itemize their deductions, meaning most homeowners can’t claim these deductions.
Want to increase your tax knowledge and grow your client base before tax season begins? Be sure to check out our library of resources on growing your tax business and our professional tax training videos.