Over a decade ago, the law changed regarding the tax treatment of gain in value on the sale of a primary residence. Some aspects of the “old law” remain as points of confusion that lead to misunderstanding of the law as it currently is.
This column deals with primary residences, not vacation or rental homes. A primary residence is further defined as a home within which the home seller has close-to-exclusively lived in the home at least two of the immediately preceding five years. Thus, arguably, every two-plus-years, a person could have a new primary residence and make tax-free money on each sale.
The multiple primary residences per lifetime is a significant change from the “old” law that allowed a person to save taxes on the sale of a primary residence only one time per lifetime and only upon the seller reaching or exceeding age 55.
The current law applies to every primary residence, which, as mentioned above, could apply to a person’s sale of homes multiple times during that person’s lifetime.
Importantly, if we sell our home for less than we paid for that home, we can sometimes claim a “loss” on our taxes.
However, homes often increase in value.
If an unmarried person sells his or her home for more money than what the person bought the home for, as long as the dollar value gained is less than $250,000, the seller will pay no tax on the extra $250,000 that is received.
A married couple can sell their primary residence for up to $500,000 more than the amount paid by the couple to purchase the home, and still pay no taxes.
For example, a married couple might purchase a home for $200,000. After at least two years of continuously living in the home, the couple might sell the home for $700,000. Put very simply, that $700,000 essentially represents return of the $200,000 purchase price along with $500,000 of gain. In such an instance, because the gain was $500,000 or less, the couple will pay no tax whatsoever on the total $700,000. In this example, if the sale price was $701,000, the couple would only pay tax on $1,000.
Notably, depreciation, land contracts and other twists on the sale proceeds’ treatment can sometimes adjust some of the tax treatment of the sales proceeds.
The public policy behind this idea is to encourage people to continually buy more expensive, new-to-them homes, thus increasing demand and supply and improving the economy.
Usually, if the entire gain from the sale of a primary residence is below the thresholds for tax obligations, the gain will not have to be reported on any tax returns. However, if there is any taxable gain — for example, for a portion of the sale price — the seller must file IRS Form 8949.
Additionally, if a seller gets a 1099-S, the seller has to file Form 8949. So, primary residence sellers should complete a 1099-S exemption form with the closing agent in order to avoid having to file an unnecessary form.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.