According to the 2011 American Housing Survey conducted by the U.S. Census Bureau, there are over 82 million homeowners in the United States. For many of them, a house is the largest asset they own. If you sell your home for more than your purchase price, your capital gain might have tax consequences, regardless of whether you sell it for cash or otherwise.
How Capital Gains Work
You need to know your basis in your home to determine your capital gain when you sell it. “Basis” is the IRS term for your home’s cost to you -- beginning with your purchase price. Home improvements that materially add to the value of the home, considerably prolong its useful life, or adapt it to new uses can increase your home's basis. For example, if you bought a house for $100,000 and built a porch on it for $15,000, your total cost is $115,000. This means that if you sell the house for $150,000, your capital gain is $35,000 -- the difference between your “cost” and your sale price. However, you can also deduct all the costs involved in buying and selling the house, such as realtor, appraisal, and attorney fees, from your capital gain.
Calculating Your Taxable Capital Gain
Uncle Sam allows you to exclude some of your capital gains on the sale of your home from taxes. If you're single, you can exclude the first $250,000 of the gain, and $500,000 if you're married filing jointly. For most people, that's going to let them sell their houses tax-free. If your gains exceed those limits, however, you might have to pay capital gains taxes up to 15 percent of the excess. That is still a much lower rate than many people pay on ordinary income. The IRS also stipulates that to claim any exemption, you have to own and live in your home for two of the past five years prior to the sale. The two years need not be consecutive. Also, your ownership and residency need not be at the same time either. For example, if lived in your condominium as a tenant for two years before the building turned condo and you purchased it, you can still claim the exemption if you rent it out for up to three years and then sell it because your two years as a tenant count toward the use of the condo.
If you sell the house for less than your purchase price, you have a capital loss on the sale. This can happen if the values of the houses in your area decrease or if you have to sell your house quickly. Unlike your capital gains, you do not report a capital loss on the sale of your house on your taxes. It is not deductible in the year it occurs or in future tax years.
Reporting to the IRS
If your capital gain is below the threshold, you do not have to report it to the IRS on your tax return. If it is above that level, you have to fill out Form 8949 Sales and Other Dispositions of Capital Assets to calculate the taxable gain. File this form with your 1040 tax return. The only exception to not reporting a gain under the exemption limit or a loss is in the case of receiving Form 1099-S from the settlement agent. If you sell your house through a lawyer or escrow agent, they will act as a settlement agent in the transaction, and are required to report the transaction on Form 1099-S. If you sell your house privately, you will not receive a form. If you do receive a 1099-S, you would also fill out Form 8949 even though the gain or loss is not otherwise reportable.
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.