March 2023 – Selling Your Personal Residence
SELLING YOUR PERSONAL RESIDENCE
Housing Market Statistics
According to the National Association of Realtors, for most homebuyers, the purchase of real estate is one of the largest financial transactions they will make. Additionally, most homeowners typically live in their homes for 10 years before selling them. When the decision is made to sell a personal residence, there are a few tax considerations to keep in mind in the sale process.
IRS Guidelines
Taxpayers who sell their homes are typically in a gain position because they sell their homes for a higher price than they paid when they purchased the home. In general, a taxable gain on the sale of property reported on a tax return is the difference between the sales proceeds and the original cost, adjusted for other amounts such as selling expenses and improvements made to the home during ownership. However, personal residence sales have an exception to this gain called the homeowner exclusion.
What is the Homeowner Exclusion?
The homeowner exclusion allows owners of personal residences to exclude a portion or the entirety of their gain on the home sale, provided that certain conditions are met.
Conditions that need to be met to qualify for the exclusion:
– Ownership & Use Test: the owner must have owned the home for at least 2 years, and used it as their primary residence for 2 years out of the last 5 years leading up to the sale. Please note: the two years do not need to be consecutive, but the taxpayer needs to have lived in the home for enough periods adding up to 24 months (or 730 days).
– In certain circumstances, taxpayers who fail the 2-out-of-5-year ownership and use tests are still potentially eligible for a partial exclusion if their main reason for selling their home was a change in workplace location, a health issue, or another unforeseeable event. Unforeseeable events can include the home being destroyed or condemned, a spouse passing away, a divorce, or unemployment. Please see IRS Publication 523 for more details on this exception.
– The capital gain exclusion is $250,000, or $500,000 for taxpayers filing a married filing joint return. If the gain on the sale of the home exceeds the exclusion amount, the portion of the gain over and above the exclusion amount is reported as a capital gain.
Keep in Mind:
– Losses on home sales are not deductible.
– If the taxpayer receives a 1099-S showing the proceeds of the sale, they are required to report the sale on their tax return even if they have no taxable gain (there will be no tax effect for reporting).
– The homeowner exclusion is only applicable to a taxpayer’s main home, and cannot be applied to more than one home per taxpayer in a given two-year period.
– If the taxpayer used a portion of their personal residence as a rental (for example, a basement rental), the taxpayer is able to exclude only the gain attributable to the personal-use portion of the home. The proceeds attributable to the rental portion of the home are fully taxable (net of the original basis and depreciation).
– In this scenario, the depreciation that was taken on the rental portion of the home is subject to recapture. The depreciation recapture portion of the gain is treated as an ordinary (not capital) gain.
Summary
Taxpayers who sell their homes are typically in a gain position after the sale. Personal residence sales have an exception to this gain called the homeowner exclusion, which allows them to exclude a portion or the entirety of their gain if certain conditions are met.
Please feel reach out to us with any questions if you are thinking about selling your personal residence and have questions regarding your eligibility for this exclusion.
Soukup Bush Deadlines
MARCH 10, 2023: For our clients with individual and C-corporation tax returns – please provide all documents and required information for individual and C-corporation tax returns by March 10, 2023.
In order to provide our best service, your tax return will be extended and completed after April 15, 2023 if there is still outstanding information needed by March 10, 2023.
Filing Deadlines
MARCH 15, 2023 – Federal and state income tax returns are due for calendar-year flow-through entities, including partnerships and S-Corporations
APRIL 18, 2023 – Federal and state income tax returns are due for individual taxpayers, C-Corporations, and Estates and Trusts
SEPTEMBER 15, 2023 – Federal and state income tax returns are due for flow-through entities, including partnerships and S-Corporations if extended
OCTOBER 2, 2023 – Federal and state income tax returns are due for trusts if extended
OCTOBER 16, 2023 – Federal and state income tax returns are due for individual taxpayers, and C-Corporations if extended
Estimated Payment Deadlines
APRIL 18, 2023 – 1st quarter estimated payments for 2023 are due to the IRS and Colorado Department of Revenue
JUNE 15, 2023 – 2nd quarter estimated payments for 2023 are due to the IRS and Colorado Department of Revenue
SEPTEMBER 15, 2023 – 3rd quarter estimated payments for 2023 are due to the IRS and Colorado Department of Revenue
EMPLOYEE SPOTLIGHT: EMMA GATZEMEIER
Emma joined the Soukup, Bush & Associates team in August of 2021. Emma grew up in the Phoenix, Arizona area and came to Fort Collins in 2017 to attend Colorado State University. She graduated with a Business Administration degree with concentration in Accounting and Finance in May of 2021. Emma is currently studying for the CPA exam. At the firm, Emma assists in preparing individual and business tax returns.
In her free time, she enjoys hiking with her dog, baking, camping, and exploring the beautiful outdoors that Colorado has to offer.