Image courtesy of Stuart Miles at FreeDigitalPhotos.net
Since selling a home is one of those events that many folks only do a few times in their lives, there is much uncertainty about what kinds of potential rules and laws may trip you up. Recent data suggests that the average American will buy and sell their primary home something like 10 times in their lifetimes – for many that number will be far less. There is a lot of information about the tax impacts of selling a home out there flying about on the internet, and some of it is mostly bunk. And much of what’s not bunk is limited in applicability.
Below are a few half-truths about home sales that you want to understand before you sell your home, along with the explanation of the facts behind them, including how they may apply to your situation if at all.
1. If I sell my house I need to buy another one with the proceeds or owe tax. Not true, as long as you lived in the home as your primary residence for two of the preceding five years. There is an exemption of the tax on such a residence sale, of up to $250,000 ($500,000 for a married couple) of gain in value over the original purchase price plus improvements to the property. In other words, if you purchased a home for $100,000, updated the kitchen for $10,000, lived in the house for three years and then sold it for $120,000, you’d have a gain of $10,000 on the sale. This sale is exempt from tax since you lived in the home as your primary residence for at least two of the preceding five years.
The truth to this one has roots in the olden days – long ago it used to be the law that when you sold your primary home you needed to purchase a new one with any gains from the sale within two years. This rule expired in 1996, so it doesn’t apply any more. Many folks think it still applies since they haven’t sold a home in a very long time and they recall this rule.
2. Beginning in 2013 if you sell your home you’ll owe an extra 3.8% surtax on the proceeds due to Obamacare. Not true, except in some limited cases. This one has gotten its traction via emails and internet postings, and has enjoyed a rather long life. I’ve written about this specific myth in the past in the article The “Tax on the Sale of Your Home” Email Myth.
Here’s the deal: Following the information presented in #1 above, if you wind up with a non-exempt gain on the sale of your primary home – either because you didn’t live in the home for 2 of the previous 5 years, OR the gain was more than the exempted limit – AND your other income (Modified Adjusted Gross Income) is greater than $200,000 for single folks or $250,000 for marrieds, then you might owe the additional 3.8% surtax on the gain.
3. Loss on the sale of my home can be written off against income. Not true, for a primary or secondary home. You (generally) don’t have to pay capital gains tax on a gain when you sell your home, and likewise you cannot take a capital loss if the sale results in a loss. This is the same for all personal property not held for investment purposes.
If you sold a property that you had held for rental purposes at a loss, this loss would be eligible to be written off against other investment gains, but losses on personal property, including your main home, doesn’t allow this option.