Tax Tip Service
IRS has an amazing Tax Tip email service. Real estate people should study them and use them as handouts to your clients. This is information from the source. I would register for their tax tip email and then google IRS Tax Tips Archives to check what has been sent out in previous years.
Some facts from Tax Tip 2021-83, June 10, 2021
This is good information in today’s market, because many homeowners are selling their homes at a gain. Will they owe tax? Agents and MLO’s read this, absorb this, and send it out to your homeowners or future homeowners or past homeowners. Anyone is a future prospect.
#1: To receive the full $250K (single) or $500K (joint) exclusions the homeowner must have owned the home and lived in it as their main home for at least two years out of the last five. This means you can qualify in two years or live in it for two years and then rent it out.
#2: If you should experience a loss when you sell it, the loss is not deductible.
#3: You can only exclude the gain on your main home.
#4: To calculate gain you can add the cost of improvements during ownership to your purchase basis.
#5: If you exclude all your gain, you do not have to report the sale.
#6: There are possible exceptions for some individuals (disabilities, some military, Peace Corp. and others).
To learn more about selling a home read, go to IRS Publication 523, Selling Your Home.
And, to subscribe to go to IRS Tax Tips.
Duane, I have been a fan for decades and love your info. However, just because advice comes from IRS does not mean that it applies equally in all cases, such as #5 above. The potential problem here comes when the escrow company files the mandatory Form 1099-S to report the gross sale price of the property. If a Single return with under $250K, or a Married Filing Jointly return with under $500K, IRS will generally assume the Section 121 exclusion (your #1 above) applies and pass the return unchallenged even if no sale is reported. If the sale price is above those amounts and no sale is reported on the return, there may be trouble. Taxpayers have the responsibility to provide their cost basis on any asset sold. If I sell my house and the 1099-S shows $700K sales price and I ignore the transaction on my 1040, IRS can and sometimes does send me a love letter, stating that their records indicate I generated a taxable gain of $450K (single) or $200K (MFJ), and would I prefer to send them a check for $ or would I prefer to send them more information to dispute their assumption?
To sidestep those painful letters, when I prepare the tax return I pull together the purchase and sale HUD-1s, along with any improvements made to the property, and ownership and occupancy calendar to qualify for the exclusion, and then I compute the approximate gain. If the gain is less than the allowed exclusion, then the sale is nontaxable. Whee! I then pull up Form 8949 and enter “SFR per Sec 121”, list the 1099-S amount for both sale and purchase price (so no taxable gain), list the purchase and sale dates, and that’s it. I’ve been treating home sales this way since the exclusion was created back in 1998, and my clients have never had any trouble from IRS.