Whether selling your home for personal use or to make a profit, there are several ways to avoid paying real estate taxes. First, you must determine whether you'll have to pay tax on the sale. The IRS uses a form called 1099-S to report the sale of a home. The gain can be excluded from taxes if you sell your main residence.
Capital Gains Tax Penalty
Capital gains tax applies to the profit you earn when you sell your home. For example, if you bought a home for $150,000 five years ago and it now sells for $225,000, you may have to pay capital gains tax. However, if you made improvements to the home before selling it, you could reduce your profit. Regardless, you'll have to file your tax return and report on your home sale, or you'll owe the capital-gains tax.
You might qualify for a capital gains tax exemption if you lived in the home for at least two years out of the last five. But this rule does not apply if you're renting or have lived in it for only two years. Depending on your circumstances, you may be able to qualify even if you lived in your home for a year or two.
Form 1099-s Required To Report Sale
Form 1099-S is a required tax form for certain real estate transactions. It is filed by banks, real estate agents, escrow companies, title companies, attorneys, and others involved in a property transaction. It is due by the deadline of March 31. A real estate attorney can assist you with this form if you are unsure of the proper process.
There are exceptions to the 1099-S requirement for a few types of sales. A sale of a principal residence under $250,000 is exempt from this requirement. Another exception is if the property is a gift or deed-in-lieu-of-foreclosure.
Excluding The Gain From Sale Of a Main Home
When you sell your main residence, you must determine if the gain will be taxable. Generally, the gain is not taxable unless you elect to be taxed on the second disposition. However, there are some exceptions to this rule.
In certain circumstances, you can deduct the entire gain from the sale of your main home, including the sale of your vacation property. However, if you have used your main residence as a second or rental property for more than two years, you may not qualify for the home-sale exclusion. In such cases, you must report your gain when it occurs. Understanding these rules before the sale of your home can help you prepare and minimize your tax bill.
The gain from selling your home is taxable, but you can still deduct up to $250,000 from it. However, the amount you can deduct depends on several factors. For instance, you must have lived in your main residence for at least two of the last five years.