Taxpayers are allowed an exclusion of a portion of the gain on the sale of their personal residence of up to $250,000, and $500,000.00 if married. Any gain thereafter is taxable at as much as 20% for federal purposes, and as much as 13.3% if one is a resident of California where the politicians and governor just gave themselves a 4% raise while many people here are out of work.
The Biden Administration is currently attempting to raise the tax on any gain above the exclusion amount to as much as 39.6%.
To qualify for the exclusion a homeowner must meet ownership and use tests.
During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their primary home for at least two years.
Taxpayers who own more than one home can only exclude the gain on the sale of their primary home which is the address one has claimed as their primary home on their tax returns during the required holding period. Many taxpayers attempt to claim some other property as their primary residence when a sale occurs, but the taxing authorities will hold a taxpayer as to the property that qualifies for the exclusion based upon what address they have indicated as the one on their tax returns. The residence that indicated on the face of tax returns during the holding period generally is the indicative property. Taxes apply as to any gain from selling any other home.
Worksheets and documentation
Most taxpayers calculate their cost basis of their residence based upon the original purchase price plus any improvements.
The IRS, and other taxing authorities can, and will request documentation as to the costs and improvements if the sale is audited. It is best to keep and maintain all records relating to the acquisition and improvement costs otherwise you may find yourself in the awkward position of paying taxes on gains that the IRS may calculate if you do not have those records.
As incredible as it may seem in the current economy, some homeowners incur a loss when selling their primary residence. Those losses are not deductible.