When selling a personal home, the most important thing is to identify your taxable basis—or how much the house is worth to you personally, and how much of the sales price is taxable. By using these two amounts, you may determine your taxable gain or loss. It is important to note that with the exclusion available for the sale of personal homes, many sales of houses may not be taxable.
Calculate adjusted basis. Your adjusted basis in your home is the amount for which you originally purchased the home plus any investments you made in the property minus any deductions. Investments include the fair market value of any additions you made to the property and any costs incurred by you during the original purchase (lawyer fees, recording fees, etc.). The primary way for the original basis of a home to be decreased is if the original seller paid for any points on the mortgage that you, the buyer, took out to buy the home.
Calculate amount realized. You begin by taking the selling price, which is how much you received for the home. This price does not include anything attributed to personal property that was included with the home, such as furniture. Then, you subtract all expenses associated with selling the home. This would include commissions, advertising fees, legal fees or loan charges paid by the seller. This provides you with the total amount realized.
Calculate the gain or loss. To do this, you subtract the adjusted basis from the amount realized.
Determine if any amount of gain may be excluded. If you owned and lived in the home for at least two years and during the two-year period ending on the date of the sale you did not exclude gain from another home, you may exclude up to $250,000 of the gain on the home from your taxes.
Report the sale on Schedule D if you had any taxable gain or loss.
Do not report the sale, however, unless you had a gain and could not exclude all of it, you had a gain and chose not to exclude it, or you had a loss.
Deduct property taxes from your income taxes the year of the sale. In the year you sell your home, you and the buyer must deduct the real estate taxes on the property according to the number of days you both owned it. As a seller, you are treated as having paid the real estate taxes for the entire period up to (but not including) the day of the sale. This is reported on Schedule A.
Special rules may apply if you received a federal mortgage subsidy when you initially purchased the home. For a complex transaction such as this, it is suggested that you consult with a certified public accountant or an attorney.
- Special rules may apply if you received a federal mortgage subsidy when you initially purchased the home. For a complex transaction such as this, it is suggested that you consult with a certified public accountant or an attorney.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.