Tax Penalties When Selling a Home

In the United States, most home sellers will not owe tax on the sale of their primary residences, due to tax exclusions and mortgage debt forgiveness relief, according to the State of California Franchise Tax Board. Those who do owe tax penalties when they sell their properties must pay off their tax debts to local, state and federal governments on time, or they may face additional interest penalties.

Non-Payment

Home sellers will face tax penalties if they attempt to hide gains from the sale of their home or do not repay a first-time homebuyer’s tax credit. They should not lie on their tax return under any circumstances, because settlement agents usually file Form 1099-S with the IRS to report home sales. Sellers who do not pay off their tax debt on time may owe underpayment penalties and compounding interest to the U.S. government and their state taxing agency.

Capital Gains

While a home seller will not pay a tax penalty when selling his home, he will have to pay capital gains tax on the difference between the price he paid for the property plus improvements and the price at which he sold it. A home seller can avoid up to $250,000 in capital gains if single and $500,000 in capital gains if married by living in the home as his primary residence for two of the past five years before selling, according to the IRS.

Tax Credit

If a homebuyer took the first-time homebuyer’s tax credit worth up to $8,000 or the existing homebuyer’s tax credit worth up to $6,500, he will have to repay the credit by filing IRS Form 5405 if he does not live in the property as his permanent residence for at least three years past the date which he closed on the home, according to the IRS. He will repay this credit for the tax year in which he sold the property by April 15 of the following year.

Local

Home sellers may face liability for tax penalties at the county and city level if they received a special exemption or severely reduced property valuation. This situation usually applies when a resident raises produce or livestock on his land and qualifies for an agricultural exemption that protects families from overpaying on property tax due to land speculation, according to the Official Property Appraiser of Charlotte County, Florida. When the resident sells his property, he will usually have to pay a set number of years worth of property tax at the full assessed value of the property.