Taxes 101: What You Should Know if You Sold Your Home This Year

If you sold your home in 2018, it is crucial that you do your research on real estate taxes since you may or may not have to pay capital gains on the profits made. Because of this, you should discover whether you are legally required to report the sale of your home and any gains for tax purposes. Below, we will discuss what you should do if you sold your home this year or plan to sell your home in the next month.

Capital Gains

Every year, the IRS claims the right to tax any difference between what you originally paid for an asset, the basis, and what you sold it for. Capital gains taxes are applicable to tangible assets such as gold or jewelry, homes, real estate, cars, boats, or intangible assets like stocks or bonds.

Capital Gains Exemption

If you meet the qualifications for capital gains exemption,you may be able to exclude up to a quarter million dollars of that gain from your income, or up to a half million dollars of profit if you file a joint return with your spouse. This tax exemption may only be submitted once every two years. If you meet the "Use Test" you may be eligible for this tax indemnity. As a note, if you wish you may not deduct any loss on the sale of your home. Unfortunately, the sale of a home at a loss does not qualify for a deduction.

The Use Test

To pass the use test, you must have owned and resided in the home for at least two of the previous five years prior to the sale. These years do not have to be contiguous; theoretically, you could live in the house for ayear, rent the property out for three years, and then reside in it for the fifth year and still pass the test.

Reporting the Sale of Your Home

There are some cases where a home is sold, and the seller signs a form which states that you will not have taxable gains on that deal. In such cases, you would not be required to send in Form 1099- S, the reporting mechanism on proceeds from real estate transactions to the IRS.

If you do sell a home and receive this document, you will be legally obligated to report the sale of the residence on your 2018 tax return, regardless of whether or not there are taxes that need to be paid on any gains.

Keep Your Receipts

The cost basis of a home does not simply include what was paid to originally obtain it; rather it incorporates all of the improvements, additions, and other such money you have sunk into the property over the years.If you increase your cost basis, your exposure to capital gains tax is lower. Examples of things that can cut your taxes include:

• A Remodel
• Additions
• Landscaping
• Pool
• Granny Unit
• New doors and windows
• Fences
• Gates
• Driveways
• Repaving
• Flooring

First-Time Home Buyer Credit

If you obtained a First Time HomeBuyer Credit for the purchase of your very first home in 2008, 2009, or 2010, you might be legally required to repay some or all of that credit after the sale of your home. You are legally obligated to pay back the lesser of the following two figures:

• Your gains made from the sale of the home
• The amount of your received

If you have no gain on the sale of the home, you may qualify for a tax exemption or credit repayment.

If You Own Multiple Homes

If you have more than just one house, you are only allowed to exclude the gains from the sale of your primary home. You are required to pay taxes on vacation or secondary homes. Even if you split time evenly between two houses—say between spring and summer and fall and winter—the main home is considered to be the one you live in the most days, even if that means 183 days in one and 182 in the other. 

Conclusion

If you sold your home at a profit, you might be exempt from paying taxes on those gains up to a certain point. In most cases, be sure to fill out and send in Form 1099-S so that you do not run into any trouble with the IRS.