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Tax Benefits of Selling Your Home

Updated: Dec 15, 2020

If you haven’t seen the show Million Dollar Listing Los Angeles watch an episode. But be warned, you might not get up from the couch for a couple of hours.

Approach the show with an open mind. On the surface, Million Dollar Listing looks like the typical staged reality show that lacks any semblance of true everyday life. The producers do an excellent job of adding excitement, rift, and anticipation to real estate transaction that are, in real life, generally mundane.

The show follows five real estate brokers that buy and sell multi-million-dollar homes in the Los Angeles area. You’ll see the brokers spend thousands of dollars trying to entice the right buyers to their listings, all for the reward of five- and even six-figure commissions.

A HUGE part of the show is capturing the price negotiations between buyer and seller that fluctuate not just in thousands of dollars but in hundreds of thousands of dollars. Yikes.

Some buyers profit off the sale and some take a loss, a big loss.

The show got me thinking about what a profit or a loss on selling a home can do to your tax liability.

Real estate transactions impact every homeowner from young couples selling their starter home for an upgrade, to older couples selling their longtime family home to downsize later in life.

To not bog you down in the legalese of the tax code, I will provide the birds eye view of the tax consequences when it comes to selling your home.

Figure your Gain or Figure your Loss

Use the formula at the left to determine your gain or loss. A positive number indicates a gain on the sale, a negative number means a loss.

(Adjusted basis is the purchase price of the home adjusted for various items. For example, the cost of a remodel is added to the home’s basis.)

Home Sale that Results in a Gain

Because home ownership is a defining feature of the “American Dream,” the tax code allows home-owning taxpayers to exclude some or all of the capital gains they realize on the sale of their main home.

Married homeowners can exclude gain up to $500,000, single taxpayers can exclude up to $250,000.

To qualify for the maximum exclusion the homeowner must meet the eligibility test:

1. Must own the home for at least 24 months out of the last 5 years leading up to the sale.

2. Must have used the home as their residence for at least 24 months during the last 5 years. If the couple is married, each spouse must satisfy the residence requirement.

3. Must not have sold a home within the last 2 years or sold a home but didn’t take the exclusion on any of the gain.

Other factors come into play when determining eligibility and the amount of gain that can be excluded. Options exist if you don’t meet the eligibility requirements. For example, you may meet requirements for a partial exclusion if the main reason for the sale of your home was work relocation, a health issue, or an unforeseeable event.

Basic Example

Here’s why this exclusion is such a big win for eligible homeowners:

Ben and Patty purchased their home in 1985 for $90,000.

They’ve paid off their mortgage and done major work on the house from remodeling the kitchen to adding a bathroom. The total remodeling costs rang in at $80,000.

In 2019, Ben and Patty decided to sell their home. The buyers purchased the home for $300,000.

Ben and Patty walk away with a capital gain of $115,000 all of which they can exclude from taxes since the maximum exclusion for married couples is $500,000.

If Ben and Patty’s gain was taxed at 15 percent, they’d have to pay a tax bill of $17,250.

Home Sale that Results in a Loss

Unfortunately, if you sell your home at a loss, you can’t deduct it on your tax return. Taxpayers can only deduct losses on property used in a trade or business, or for investment purposes.

Make sure you’re not in this boat since the loss on your home doesn’t reduce your tax liability.

The next time you’re watching Million Dollar Listing Los Angeles remember that not everyone walks away with a million-dollar profit when selling their home. But that doesn’t mean you can’t fantasize about what you’d do with the money!

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