This is a rough time of year to be selling your home or other real estate. Not only are we facing a possible recession, but the real estate market is facing higher mortgage rates, hesitant buyers, and by the latest count about 20% of home sellers are lowering their asking prices. There are also tax questions and tax issues to face when you sell. And buyers should be aware of these issues as well because someday they might be selling.

The Big Tax Issues

How long you live in your home can impact your taxes when you sell it. If you live in the home long enough, some or all of your profit can be tax free.

It’s important that you discuss your real estate activities with a tax professional. Some Realtors take special courses on tax laws but many Realtors do not. 

Here are some basics you should keep in mind.

Dealing With Gains When You Sell

Taxpayers who sell their main home and have a gain (profit) from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. Homeowners excluding all the gain do not need to report the sale on their tax return unless a Form 1099-S was issued.

To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years. So, if you lived in the home for at least two of the previous five years you could be pocketing a big windfall that you don’t have to pay taxes on.

What If You Lost Money When You Sell?

Unfortunately the real estate market is turning now. While it is still possible that most sellers will be selling at a profit at least in the next few months, if the recession drags on home prices could drop to the point that some sellers might be taking a loss.

And this is really unfortunate: taxpayers who experience a loss when their main home sells will find that this loss is not deductible. Unlike stocks or gold your main home is not considered an investment. So if you sell it at a loss, you have to eat the loss. Keep this in mind when you’re told that your home is the biggest investment you’ll make in your life. As far as the tax law goes, your main home isn’t an investment. And as far as the IRS is concerned, you might have to pay taxes when you sell it for a profit, but you can’t deduct any loss if you are forced to sell it at a loss.

Multiple Homes And Your Taxes

If you own more than one home then the home that does not qualify as your main home is considered to be an investment property. You can only exclude the gain on the sale of the main home. You must pay taxes on the gain from selling any other home.

So, simply put, any secondary home you have is an investment property and the profit is taxable starting with the first dollar of profit when you sell it.

Again, here’s where you need to discuss your tax situation with a tax professional. Whether you can deduct the loss on a second home may depend on your other investments and if it was rented out for income. Those conditions may impact your tax situation.

Remember, check with a tax professional.

Selling Your Home To Cover Your Tax Debt

In a bad tax scenario you might be thinking about selling your home or selling an investment property in order to pay off your tax debt. Before you do that, talk to a trusted tax professional. Our tax professionals can discuss with you alternatives including the IRS Fresh Start Initiative and the IRS Offer In Compromise Program to pay off your tax debt or to reduce your tax debt.

Keep in mind that the IRS Fresh Start Initiative is not open to everyone, but in just a few minutes during a free consulation, you can find out from our tax professionals if you might qualify for the IRS Fresh Start Initiative and if you are eligible for an Offer In Compromise Program.

If you are not eligible for the IRS Fresh Start Initiative and the IRS Offer In Compromise Program, there are other ways you might be able to pay down your tax debt in a way that will ease some of the burden. There are payment plans available, for example.

Call us for a free consultation and it really is a free consultation. Our tax experts will tell you what the IRS Fresh Start Initiative might be able to do for you, and in a few minutes you’ll find out if your eligible for the Fresh Start Initiative or if another payment program will help you.

In the meantime, best of luck to those of you who are now active in the real estate market. While Labor Day Weekend marks the end of the traditional peak season for real estate buying and selling, there is still an opportunity for buyers and sellers to make a deal.