If you’ve recently sold your home in Middle Tennessee, or are about to close on a sale, then chances are you’re realizing a healthy gain on your investment. With that in mind, it’s time to take account of the income tax implications.
The principal question, of course, is what will you owe on the net earnings from the sale? If you speak IRS, then your next stop should well be IRS Publication 523. But before you go there, take a look at this summary from Money magazine.
First of all, Money writes that your tax liability is contingent upon how long you lived in the home. For example, if you’re a single homeowner and spent at least two of the last five years in the home, then up to $250,000 in net gains on the sale are tax-free. If you’re a couple filing jointly, then your threshold for tax-free gains escalates to $500,000. However, for any gains that exceed your threshold, you’ll owe capital gains taxes.
Follow these steps from Money to determine your gains:
- Subtract selling expenses (i.e. professional fees and other closing costs) from the sale price to arrive at a net sale price.
- Calculate your basis: this is what you paid for your home, plus certain closing expenses such as title insurance and recording fees (but not loan points or lender fees), as well as the cost of permanent improvements (i.e., an addition, or a swimming pool).
- Your gain is the difference between 1 and 2.
Money tells us to be aware of exceptions to the two-year rule. If you’re disabled, relocating for work that’s more than 50 miles away, moving to seek medical treatment for yourself or a relative, or for certain “unforeseen circumstances,” then taxes on the gains can be pro-rated. As in any major financial decision, play it safe, and check first with a local Middle Tennessee tax advisor.