SOURCE: IRS Summertime Tax Tip 2014-08
Do you know that if your client sells their home and makes a profit, the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you had any clients sell their home this year.
- If your client has a capital gain on the sale of their home, they may be able to exclude their gain from tax. This rule may apply if they owned and used it as your main home for at least two out of the five years before the date of sale.
- There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For details see Publication 523, Selling Your Home.
- The most gain they can exclude is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
- If the gain is not taxable, they may not need to report the sale to the IRS on your tax return.
- They must report the sale on their tax return if they can’t exclude all or part of the gain. And they must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report your client’s sale you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
- Generally, they can exclude the gain from the sale of their main home only once every two years.
- If they own more than one home, they may only exclude the gain on the sale of their main home. The main home usually is the home that they live in most of the time.
- If they claimed the first-time homebuyer credit when they bought the home, special rules apply to the sale. For more on those rules see Publication 523.
- If they sell their main home at a loss, they can’t deduct it.
- After they sell their home and move, be sure to give that they give their new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.