Personal Residence - https://www.irs.gov/pub/irs-pdf/p523.pdf
What are the rules for sale of your principal residence?
Do I have to pay taxes on the profit I made selling my home?
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
What are the ownership and use tests?
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
- Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
- Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you're married and want to use the $500,000 exclusion:
- You must file a joint return.
- At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.
Special circumstances -
Even if you don't meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:
- If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the two-out-of-five-years test.
- To meet the use requirement, you are allowed to count short temporary absences as time lived in the home, even if you rented the home to others during these absences. If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn't live in the home can still count the days of use that the other spouse lives in that home. This can come into play if one spouse moves out of the house, but continues to own part or all of it until it is sold.
- If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test.
Members of the uniformed services, foreign service and intelligence agencies -
You can choose to have the five-year-test period for ownership and use suspended for up to ten years during any period you or your spouse serve on "qualified official extended duty" as a member of the uniformed services, Foreign Service or the federal intelligence agencies. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are:
- At a duty station that is at least 50 miles from your main home, or
- Residing under government orders in government housing
This means that you may be able to meet the two-year use test even if, because of your service, you did not actually live in your home for at least the required two years during the five years prior to the sale.
How can I qualify for a reduced exclusion?
In certain cases, you can treat part of your profit as tax-free even if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests because of a change of employment, or a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. So if you need to move to a bigger place to find room for the triplets, the law won't hold it against you.
Note: A reduced exclusion does NOT mean you can exclude only a portion of your profit. It means you get less than the full $250,000/$500,000 exclusion. For example, if a married couple owned and lived in their home for one year before selling it, they could exclude up to $250,000 of profit (one-half of the $500,000 because they owned and lived in the home for only one-half of the required two years).
Publication 523 / Pages 3-6.
https://www.irs.gov/newsroom/irs-issues-home-sale-exclusion-rules
https://turbotax.intuit.com/tax-tips/home-ownership/tax-aspects-of-home-ownership-selling-a-home/L6tbMe3Dy
How do I calculate a gain or loss on a home sale?
Figuring Gain or Loss - To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Subtract the adjusted basis from the amount realized to get your gain or loss.
Selling price
− Selling expenses
_______________________________
Amount realized
− Adjusted basis
__________________________________
Gain or loss
A positive number indicates a gain; a negative number indicates a loss.
Publication 523 / Page 8
Certain events during your ownership, such as use of your home for business purposes or your making improvements to it, can affect your gain or loss. *
How do improvements to your home impact cost basis?
You need to know your basis in your home to figure any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Generally, your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home.
https://taxmap.irs.gov/taxmap2013/pubs/p523-002.htm
Publication 551 / page 4
What is the adjusted basis of my home?
The adjusted basis is simply the cost of your home adjusted for tax purposes by improvements you've made or deductions you've taken.
For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.
Here's how you calculate the adjusted basis on a home:
Start with the purchase price of your home (as described above)
- Or, if you filed Form 2119 when you originally acquired your old home to postpone gain on the sale of a previous home (back in 1997 or earlier), use the adjusted basis of the new home calculated on your Form 2119. (See Postponed Gains Under the Old "Rollover" Rules section.)
To that starting basis add: +
- The cost of any improvements that added value to your home, prolonged its useful life, or gave it a new or different use.
- Any special tax assessments you paid.
- Amounts spent after a casualty (a disaster such as a hurricane or tornado) to restore damaged property.
From that upwardly adjusted basis subtract: -
- Certain settlement fees or closing costs (+ or -) (added to basis when paid as buyer) OR (Deducted from gain when paid as seller)
- Depreciation allowed for any business use portion of your home.
- Residential energy credits claimed for capital improvements.
- Payments received for easements or right-of-ways.
- Insurance reimbursements for casualty losses.
- Casualty losses (from accidents and natural disasters) that you deducted on your tax return.
- Adoption credits or nontaxable adoption assistance payments for improvements added to the basis of your home.
- First-time homebuyer credit.
- Energy conservation subsidies excluded from your gross income.
- Any mortgage debt on your principal residence that was discharged after 2006 but before 2016, if you excluded this amount from your gross income. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.
The result of all these calculations is the adjusted basis that you will subtract from the selling price to determine your gain or loss. This adjusted basis is what's considered to be your cost of the home for tax purposes.
Publication 523 / Page 8-9
What are the rules for mortgage interest deduction?
You can deduct home mortgage interest if all the following conditions are met.
- You file Form 1040 and itemize deductions on Schedule A (Form 1040).
- The mortgage is a secured debt on a qualified home in which you have an ownership interest. (Publication 936 / Page 4)
- 1 million (if purchased 12/16/17 or earlier) –not inflation adjusted.
- $750,000 if purchased 12/17/2017 or later.
- HELOCs no longer able to be deducted as of 1/1/18
- Unsecured interest (personal is non deductible interest) ie. Credit Cards.
Publication 936 - Home Mortgage Interest Deduction
What are the rules for deducting home equity interest?
You can no longer do so in years from 2018 moving forward.
When is property tax deductible?
No matter how many homes you have...? you can deduct the property tax on all homes up to the limit of $10,000 for state and local taxes (SALT) as well as property taxes.
Can I take a loss on the sale of my personal residence?
No, If you sell your home at a loss, the money you receive is not taxable. However, you cannot deduct the loss from other income.
What is the NYC mortgage tax?
http://www.tax.ny.gov/pit/mortgage/mtgidx.htm
Is reverse mortgage interest deductible?
Only in the year when the loan is paid off, not year to year as it is occuring.
The bank has first claim on the sale proceeds but anything above the proceeds may be able to be distributed among the beneficiaries. You claim interest deduction when you pay it.
Publication 936 / page 5
How long after the purchase or renovation of a home does a client have to take a loan to qualify the loan as home acquisition debt?
A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home.
1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1 later.)
2. You build or improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.
3. You build or improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage.
Publication 936 / page 9-10 left
Can you deduct real estate transfer tax?
Transfer taxes (or stamp taxes). You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. ie. Not deductible, the fee would increase basis on a purchase but decrease proceeds on a sale. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.
If the home sale exclusion is lower than this may help.http://www.state.nj.us/treasury/taxation/lpt/rtffaqs.shtml
Publication 530 / page 3
What if someone gifts you a home?
Use the following chart to find the basis of a home you received as a gift.
IF the donor's adjusted basis at the time of the gift was - THEN your basis is...
More than the fair market value of the home at that time - the same as the donor's adjusted basis at the time of the gift.
Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. If using the fair market value results in a gain, you have neither gain nor loss.
Equal to or less than the fair market value at that time, and you received the gift before 1977 - the smaller of the:
• donor's adjusted basis, plus
any federal gift tax paid on
the gift, or
• the home's fair market value
at the time of the gift.
Equal to or less than the fair market value at that time, and you received the gift after 1976 - the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next).
Wha is the basis step up for a spouse?
Surviving spouse.(p8)
If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). The basis in your interest will remain the same. Your new basis in the home is the total of these two amounts.
If you and your spouse owned the home either as tenants by the entirety (TE) or as joint tenants with right of survivorship (JTWROS), you will each be considered to have owned one-half of the home. Half is stepped up upon death.
Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).
Community property.(p8)
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
For more information about community property, see Publication 555, Community Property.
https://taxmap.irs.gov/taxmap2013/pubs/p523-002.htm