Greg: We’re back with another episode of the podcast. Steph, how are you?
Steph: I’m doing great. How are you?
Greg: I’m doing well, thank you. One of the last episodes, we talked about, you were discussing ramifications of adding people to deeds and some of the things you needed to think about beforehand. One of the issues you talked on, was tax implications. I wanted to branch off of that a little bit. That has to be a big issue for people selling homes, right? What does it mean to their taxes? I know that you’re not an accountant, but when you’re dealing with people and selling houses, do you have some advice on what the sale of the house might mean for their tax?
Steph: Yes. I first have to disclaim that, obviously, they should talk to their CPA or tax attorney to get up-to-date information on tax implications of selling your home. There are some … I’ve got some tips that I’ve gotten from the IRS that people should keep in mind when selling a home. These came from the IRS and you go to go the IRS website and get more information about this. I thought it’d be really …
Greg: This fits in with your approach. You’re always about getting information up front and disclosure. Someone who’s looked at this information or listened to this podcast, will be more prepared or at least know what they’re getting into when it comes time to sell or buy a house.
Steph: Correct. I’ve got ten tips.
Greg: All right!
Steph: The first thing to think about is, “Have you made a profit?” At your closing, are you getting a check. Do you walk away with a check? If you do, you are eligible, potentially, to exclude the gain from your income if you have owned and used your home as the main home for two years out of the five years prior to the date of the sale.
Greg: Okay. So, a vacation home. That’s not what they’re talking about.
Steph: They’re not talking about a vacation home. They’re talking about your primary residence.
Steph: If you’ve occupied the house within two of the last five years and you’ve made a gain, then, there’s this potential. That would trigger this. That’s the # 1. To put in your mind. #2. Is if you have a gain from the sale of your main home, you may be able to exclude it, up to $250,000, if you’re single and $500,000 on a joint return.
Greg: The dollar amount you’re talking about is the profit. Not necessarily, the sales price. If I bought a house off the Louisville MLS for $250,000, say, five years ago, and in this market, let’s say I sold it for $350,000, that’s $100,000 profit. Correct?
Greg: That’s the amount we’re talking about.
Greg: Not the $350,000 sales price.
Steph: Correct. It’s up to $250,000 is eligible for exclusion if you only file a single return. If you’re a joint return, you’re eligible to have up to $500,000 excluded.
Greg: Okay. That makes sense.
Steph: # 3 is, you are not eligible for exclusion if you excluded the gain from the sale of another home during the two year period prior to the sale of your home. If you have claimed another home, you can’t get the exclusion on this home. That just makes common sense.
Greg: One bite of the apple, right? You get to do it once.
Steph: Right. That’s right. # 4. If you can exclude all of the gain, you do not need to report the sale on your tax return. You don’t have any gain, there’d be nothing to report.
Greg: Okay. Is that why closing agents ask … When you’re doing a closing, that’s why you ask because you would have to then tell the IRS if someone profited $500,000 or more if they’re a married couple?
Steph: Right. What we’ll do at the closing, your closing attorney, when you’re selling, has a form called a 1099. We’re required to ask these questions of whether you’ve owned the home and lived there for at least two of the last five years. Did you use it for rental? Business? Then, we look at the contract price to see if the contract price is potentially could put you in the ballpark of $250,000, if you’re a single filer, or $500,000, if you’re married.
So, the closing attorney will ask you at closing these questions. If we think we need to report it, all the closing attorney is doing is reporting the sale that there was a sale to the IRS because then, the IRS would be looking for you to be filing the tax return reporting potential gain. If we think it is excluded, it doesn’t mean that you don’t owe taxes or need to report it, it just means for the closing attorney, they personally don’t need to even report that there has been a transaction to the IRS. It doesn’t mean that you don’t still need to seek a CPA and tax advice to determine if you need to report any gain.
Greg: I got you off track. I’m sorry. We’re on # 5. I’ve forget where we are.
Steph: We’re on # 5.
Steph: If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses. That’s where that would go on a return. # 6. You cannot deduct a loss from the sale of your main home. When they changed and made the exclusions, you can’t also then take a loss from the main home. That makes sense.
Greg: Again, for an example, what did I say? I bought a house for $250,000 and I lived in an area where I didn’t see any appreciation and I sold it for $225,000. I don’t get to claim that $25,000 loss.
Steph: Correct. Currently, the tax laws for your personal residence don’t allow you to claim loss.
Greg: That’s just a bad run of luck for me.
Steph: Correct. # 7 is that there are worksheets published by the IRS. It’s Publication 523, Selling Your Home, that can help you figure your adjusted basis of the home you sold, the gain, or loss, on the sale, and the gain that you can exclude. If you’re doing your own taxes, you will want to check out Publication 523 Selling Your Home. IRS provides really good advice. You can find that online.
Steph: # 8 is, if you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in, most of the time.
Greg: The first one is your residence. The second home is looked more as an investment, I guess, or … There’s no way around it. You’re going to pay taxes when you sell that one.
Steph: Right. Exactly. You can’t claim two, even if you’re pretty equal. You’ve got to choose at some point.
Greg: One day more over here.
Steph: Correct. # 9 is if you receive a first time home buyer credit within 36 months of the date of the purchase, the property is no longer used as your principle residence. You were required to pay that tax credit. If that is in the ballpark, definitely, if you took any first time home buyer credits, if that was available at the time. You’ll want to make sure that you account for that when you do sell that property. There is some … Make sure if you have ever claimed any kind of credit, that that is taken into account.
# 10 is make sure when you move, you update your address with the IRS and the US Postal Service to insure you receive any refunds or correspondence from the IRS. There’s actually a change of address form to notify the IRS of an address change.
Greg: Awesome. That sounds like a pretty thorough list. I suppose that list is true across the country. Those are federal rules.
Steph: Yeah. This actually comes out of the IRS Publication 523.
Greg: I’m a little curious since we’re in the mid-West here, in Louisville. I guess some people would say we’re in the south. We’re not in some of the markets where prices just jump astronomically year-over-year, like maybe a San Francisco or some of the California markets or New York or something where … Our average sales prices here … I’m curious. Do you see a lot of transactions where some of these values are even triggering some of the IRS values? I don’t see values jumping that much to where people are going to make the kind of money on the sale of their property where this becomes much of an issue sometimes.
Steph: Yes. The average contract price for a married couple is $500,000 that we would be triggering a potential gain. That’s the threshold in Louisville, Kentucky, with average contract price being a little bit lower. A lot of the time, in closings, when we ask those questions about, “Do you live at the property for at least two of the last five years? Have you used it for business or rental?” They say, “No.” “Yeah, we live there, but no, we didn’t rent it or use it for business.” Then, we, personally, aren’t reporting, which then they still have to go see a CPA or an accountant or do their taxes and verify that they are not subject to tax on the gain.
I’d say on most transactions, the answer would be “No, we’re not, as a closing attorney, reporting.” There are good numbers. My office is in the east side of Louisville. We have hire contract prices here. There is a significant number of also of investors that we work with. Obviously, it is reportable if it’s vacant land. If it’s an investment property. It wasn’t an owner occupied property.
Greg: Everyone’s different, right?
Steph: Yeah. It just depends on the type of the closing that we’re handling, but it is an investment market right now. We work with a lot of investors here at Horne Title and also a lot of builders and vacant land. People are building homes. That’s, when you sell, we would be reporting the property.
Greg: This is great information to get someone started but they should always double-check and make sure that they’re following the rules and being good boys and girls on their taxes.
Steph: Yes. This information comes directly from the IRS. It’s helpful to also, when you sell your home, if you’re doing your own taxes to make sure you do it right because there could be a gain on the sale if you have made a profit. I recommend seeing a tax attorney and/or a good CPA.
Greg: That sounds awesome. Thanks for finding that information for us. I look forward to the next episode.
Steph: Thank you, Greg.