All You Need to Know about Tax Penalties for Home Resales

When you sell a home that you've owned and lived in as your primary residence for at least two of the five years leading up to the sale, you may be eligible for the capital gains exclusion, which allows you to exclude up to $250,000 of the gain from your income if you're single and up to $500,000 if you're married and filing jointly. However, if you don't meet the eligibility requirements for the capital gains exclusion, you may be subject to paying taxes on the profit you make from the sale of your home. Additionally, if you fail to report the sale of your home on your tax return and pay the taxes owed, you may be subject to penalties for underpayment of taxes.

 

The eligibility requirements for the capital gains exclusion on the sale of a primary residence

The eligibility requirements for the capital gains exclusion on the sale of a primary residence are as follows:

  • Ownership: You must have owned the home for at least two of the five years leading up to the sale.
  • Use: You must have lived in the home as your primary residence for at least two of the five years leading up to the sale.
  • Timing: You must not have claimed the capital gains exclusion on the sale of another home within the two-year period prior to the sale of the current home.
  • Filing status: The exclusion is limited to $250,000 for single filers and $500,000 for married couples filing jointly.
  • Principal Residence: It should be your principal residence not a rental or vacation home.

It's important to note that there may be other requirements and limitations, depending on your specific situation, so it's always a good idea to consult with a tax professional before making any decisions about the sale of your home.

 

How to avoid tax penalties when selling your house

The IRS has a provision known as the "primary residence gain exclusion" that allows homeowners to exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of their primary residence, as long as they have lived in the home for at least 2 of the last 5 years. However, if you do not purchase a new primary residence within a certain period of time, you may be subject to a tax penalty. The specific period of time that you have to buy a new primary residence in order to avoid the tax penalty is typically referred to as the "replacement property period." The replacement property period is typically defined as the "earlier of" either:

  • 2 years from the date of the sale of the original property, or
  • the due date (including extensions) for filing the tax return for the year in which the original property was sold.

It is important to note that this information is not tax advice, and you should consult a tax professional for advice on your specific situation.

There are several ways to avoid tax penalties when selling your house:

Meet the ownership and use test: To qualify for the primary residence gain exclusion, you must have owned and lived in the home as your primary residence for at least 2 of the last 5 years.

Timing: If you need to sell your home before the 2-year period has passed, you can try to sell it as close to the 2-year mark as possible.

Replacement property: If you are unable to meet the ownership and use test, you may still be able to avoid the tax penalty by purchasing a new primary residence within the replacement property period, which is typically 2 years from the sale of the original property.

Renting out the property: If you have lived in your home as a primary residence, but then rent it out for a period before selling it, you may still be able to qualify for the primary residence gain exclusion.

1031 exchange: A 1031 exchange allows you to defer paying taxes on the sale of your primary residence by using the proceeds to purchase another property, typically an investment property.

It is important to note that this information is not tax advice, and you should consult a tax professional for advice on your specific situation.

 

Summary

When you sell a home, you'll pay real estate taxes, documentary stamps on the deed, and capital gains tax. Every state and county in America can have different taxes and tax rates. Capital gains tax can be a big one, it can be up to 20% of your gain as of 2021. However, there are ways to legally avoid taking this massive tax hit right now. Keep the home for at least two years, to benefit from a major exemption. If you have lived in the property for at least two out of the past five years, the first $250,000 in capital gains is tax-free. If you don't need all the money from the sale of your property right now, you can sell it on some form of installment contract.

 

If you plan to sell your house, consider using realiff agents to receive up to a $20,000 rebate on a $1.5M house. You can also consult with our agents for free and obligation free.  

 

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