Preface: Sales of personal residences have specific tax attributes with provisions for exclusions for taxable gains when a residence sales price exceeds the property basis. Tracking basis on your residence before the sale, and tax planning appropriately can lead to a good crop on harvest.
2020 Transaction Planning: Sale of Main Residence
When selling your main home, you may qualify to exclude from your taxable income all or part of any gain from the sale. Your main home is generally the one in which you live most of the time.
Ownership and Use Tests
To claim the Section 121 sale of home exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
- Owned the home for at least two years (the ownership test)
- Lived in the home as your main home for at least two years (the use test)
Gains and Losses
If you have a gain from the sale of your main home, i.e. your sales price exceed your basis in the property, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a married filing joint return). You cannot deduct a loss from the sale of a main home.
Reporting the Sale Transaction
If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable with tax Section 121. Additionally, you must report the sale of the home if you can’t exclude all of your capital gain from income.
More Than One Home
If you have more than one home, you can exclude 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.
Example One. You own and live in a house in town. You also own a vacation house in the mountains, which you use periodically during year. The house in town is your main home; the vacation house in the mountains is not.
Example Two. You own a house in specific municipal jurisdiction, but you live in another house that you rent in that jurisdiction. The rented house is your main home for tax purposes and a Section 121 exclusion.
Business Use or Rental of Home
You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.
Example. On February 1, 2014, Amy bought a house. She moved in on that date and lived in it until May 31, 2015, when she moved out of the house and put it up for rent. The house was rented from June 1, 2015, to March 31, 2017. Amy moved back into the house on April 1, 2017 and lived there until she sold it on January 31, 2019. During the 5-year period ending on the date of the sale (February 1, 2014 – January 31, 2019), Amy owned and lived in the house for more than 2 years.
Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.
Sale Home on Installment Sale Method
If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, you may report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the Section 121 exclusion of gain remains available on the main home.
If you have any questions related to the sale of your main home or vacation home, please call our office. We’re happy to discuss your options.