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After You Sell
After You Sell
Taxes and Profits, Required Tax Filings, Post-transaction, Moving and Services, Moving with Family
Taxes and Profits
Most people sell their houses for more money than they originally paid to purchase them. The difference between the price you pay to buy a home and the amount you receive when you sell it is generated by some combination of increases in value that have nothing to do with you and improvements that you put into the place. Fortunately, the IRS only defines the first factor as potentially taxable profit.
Suppose that you buy a house for $200,000 and sell it ten years later for $300,000. While you owned the place, you spent $20,000 remodeling the kitchen and bathroom. According to the IRS, your profit on the sale is $80,000. We'll get into more of the nitty-gritty details about all the items that the IRS requires you to consider in calculating your house sale profits.
Excluding house sale profits from tax
So, you've made a profit of $80,000 on the sale of your home. How much federal tax do you owe on it? Probably none. In fact, thanks to the Taxpayer Relief Act of 1997, single taxpayers can realize up to $250,000 and married couples up to $500,000 of profit on a house sale without having to pay any tax on it. Most people's house sale profits fit well under these limits.
- As long as the house you're selling has been your principal residence for at least two of the previous five years, you can take the tax exclusion at any age and for as many times in your life as you want (but not more than once every two years). There are no restrictions on what you must do with the profits.
- The old rules were much more restrictive: Before, if you were under age 55, you couldn't exclude any gain from tax; you could only "defer" it by purchasing a replacement residence which cost at least as much as the one you sold. If you were over age 55, you could take an exclusion, but it was only for $125,000 and just a once-in-a-lifetime deal.
- In order for a married couple to qualify for the $500,000 exclusion, both spouses must individually meet the qualifications: that is, both spouses must have lived in the house for two of the previous five years and neither spouse can have taken an exclusion on another house sale during the previous two years. If only one spouse qualifies, then the couple is only allowed a $250,000 exclusion.
- If you fail to meet the two-year requirements because of an unexpected move relating to your job, your health, etc., you are still entitled to a prorated amount of the exclusion based on how much time of the two-year requirement you were able to meet.
- If you hold title to your house as a joint tenant with another person, you get a stepped-up basis for tax purposes on half of the property when the other joint tenant dies. If the title to the house is held as community property, both halves of the house get a stepped-up basis when one spouse dies. Consult a good tax/legal advisor for more details.
Required Tax Filings
After you sell your house, you don't need to immediately report the sale to the Internal Revenue Service. Rest assured, however, that the IRS knows of the sale because whatever firm handles the closing reports the financial details of the sale on Form 1099-S. You should receive a copy of this form, as well.
Form 2119: "Sale of Your Home"
When the time comes to file your annual IRS Form 1040, you need to complete Form 2119, "Sale of Your Home", if you sold your house. Whether you made or lost money on the sale, you must complete this form and file it with your Form 1040.
Gain on sale
The first part of Form 2119 which you have to fill out no matter which rules you're subject to, is by far the hardest part to complete. You need to tally the expenses involved in selling your house, and you also need to determine the amount the IRS calls the cost basis of the house. Determining the cost basis gives many a house seller a headache because this figure reflects not only the amount you originally paid for the house but also the money spent on improvements while you owned the property.
To calculate your gain on the sale, you need to determine two important numbers: expenses of sale and adjusted cost basis of the house you sold.
Expenses of sale
After you sell your house, the IRS allows you to deduct from the selling price certain expenses incurred in the transaction, such as the following:
- Real estate agent commissions
- Attorney fees
- Title and closing fees
- Recording fees
- Advertising expenses
- Buyer's loan fees
Unfortunately, paying off your outstanding mortgage does not count as an expense of sale.
Adjusted cost basis
For tax purposes, the cost basis of your house starts with the price you originally paid for it, including certain closing costs, which the IRS allows you to add to the purchase price of the house. During the time you own the house, however, that basis can change. Home improvements increase your cost basis by the dollar amount you spend on them.
- In the eyes of the IRS, an improvement is anything that increases your home's value or prolongs its useful life, such as landscaping, installing a new roof, adding rooms, installing a new heating or air conditioning system, and so on. On the other hand, repairs that simply maintain your home's condition -- fixing a leaking pipe, repainting, replacing a broken window, spackling holes in walls and baseboards -- are not considered improvements.
- Another factor that may affect your cost basis is depreciation taken for rental or business use of a portion of your property over the years. For example, if you convert your 2-car garage into an office or if you're renting a spare room, you can take depreciation on the portion of the property devoted to business or rental purposes. Depreciation reduces your property's cost basis. (Note: The portion of your property devoted to business or rental purposes is not eligible for the tax deferral under the primary residence tax deferral rules.)
Here's a simple example to show how the IRS wants you to calculate the gain on your house sale in Part I of Form 2119. Suppose that you bought your house for $100,000. Over the years of ownership, you spent the following on improvements:
- $6,000 on a new roof
- $2,500 on landscaping
- $1,500 on new electrical wiring
Thus, you raise your cost basis in the property to $110,000. You sell the house for $200,000. However, after paying real estate commissions and other expenses of sale, you only receive $180,000. Thus, your profit as defined by the IRS comes to $180,000 - $110,000 = $70,000.
Confirm all information with your accountant or attorney.
If you sell your house and don't immediately buy another one, you need a place to keep your proceeds. Contact your Financial Advisor to discuss options on post-transaction finances.
Moving and Services
Our goal is to provide you with a complete home ownership experience. So, in other words, our job doesn't end when the sale is final. After the transaction is complete, your agent will provide you with some valuable property transfer services that are designed to make the move from your old home to the new one, smooth and efficient. Contact your agent for more information.
Miscellaneous moving checklist
- Automobile registrations - remember to update driver's licenses and auto club membership.
- Medical records - arrange for medical and dental records to be transferred. Ask your physician for a referral.
- Employment recommendations - have teenagers obtain written recommendations from their current employers.
- Empty and defrost the freezer. Have appliances serviced for moving.
- Plan for special needs of infants.
- Carry currency, jewelry, and documents yourself.
- Double-check all rooms, closets, drawers, and shelves.
- Leave old keys and garage door openers with your real estate agent.
- Change the locks in your new home for safety.
Moving with Family
Moving to a new home is an exciting experience. Comprehensive pre-planning, organization and family meetings can help establish each person's responsibilities and will go a long way in maintaining harmony and efficiency.
Helping children make the move
Tell them about your plans as soon as possible and give them a chance to express their concerns while sharing some of your own.
- Scrapbooks are a good way to preserve memories of your current home, and all of the ties that go with it. Give your child an address book for noting names and addresses of friends in their current neighborhood and remind them to leave room for their new friend's names.
- If possible, take your children to their new neighborhood so they can become familiarized with their surroundings. If you are moving from out of state, provide them with photographs of their new home and school. Visit or provide photographs of parks, schools, and other nearby attractions.
- When you have made the move, introduce them to teachers and the new neighbors.
- Involve them in packing up and provide them with their own "packing labels" for marking personal possessions.
- Have a going-away party so they can say good-bye to their friends.
- Involve your children in planning, arranging, and decorating their new bedrooms.
Helping pets make the move
- It is best to transport your animal using a pet carrier.
- Have your current veterinarian recommend a clinic near your new home, and request that your pet's paperwork be forwarded to them.
- It is not unusual for pets to experience some level of anxiety during the early stages of a move, as they get used to their new environment.
- Some pets actually try to return to their old home directly after a move, so it's important to keep a close eye on them.