Tax Musings of a Burbank CPA: Will You Owe Income Tax When You Sell Your Residence?

So you are planning on selling your residence and you are going to make money on the sale.  Are you going to have to pay income tax on the gain?  Well, the quick answer is maybe (you are thinking, thanks a lot! right now.)

After calculating the gain on the sale of the residence (you can check on my previous blog post on how to do this – check my July 5 blog), you have to answer some questions.   Did you own and live in your residence for at least 2 out of the last 5 years?  If so you probably can exclude up to $250,000 in gain (up to $500,000 if you are married).  You may or may not be required to report the sale on your tax return if you can exclude the gain (I always recommend including the sale if the form 1099S that the escrow company sends you is more than the applicable exclusion amount; it can save a letter later on.)

Generally you may only exclude your residence gain only once every 2 years (there are some exceptions.)  Also if you own more than one home, you can only exclude the sale of the principal residence, not a vacation home (you may need to show the home you sold is your principal residence.) If you lived in the house less than 2 years before the sale, there are circumstances where you can get a prorated exclusion of gain based on how long you lived in your home.

If you ever rented the home out, then moved in to live in the home, any depreciation taken on the home when it was rented after May 6, 1997 will both increase the gain, plus the depreciation has to be recaptured at 25% even if the total gain could be excluded (say you sold the home for a $200,000 gain, but had rented it out before living in it and had deducted depreciation of $50,000. The $150,000 attributable to the residence sale can be excluded, but $50,000 attributable to the depreciation deduction will have to be recaptured at 25%, resulting in tax of  $12,500.)  

When you come down to it, it would be a good idea to run this by a tax preparer to make sure you can take the exclusion and what tax might be due, if any.

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