by Karen Stern
The pandemic ignited change in many ways, including a boom in home sales. If you’re thinking of taking this step, here are some tax considerations before putting your home on the market.
Gain Exclusion May be Available
You may be able to exclude some of the gain on the sale of your personal residence if you owned the personal residence for fewer than two years if your reason for moving is related to a job change, health issues or other qualifying reasons.
Loss on the Sale of a Personal Residence
Real estate is generally an appreciating asset, but there are times when a home is sold at a loss — even in the current real estate environment. Unfortunately, the loss on the sale of a personal residence is considered a non-deductible loss. The loss cannot be used to offset other gains from other investments.
Taxes May Apply to the Sale of a Personal Residence?
States each have their own approach to the taxation of the gain from the sale of a personal residence. Some states follow the federal gain exclusion amounts; some states have a separate gain exclusion amount as well as different rules to qualify for the gain exclusion; and some states do not have a gain exclusion at all and tax the full gain regardless of how long you owned the personal residence.
To the extent that you depreciated your home while you lived there as an office for a small business or as a partial rental, there may be a portion of the gain that is recaptured at a rate higher than the long-term capital gain tax rates.
Another consideration that real estate investors can use for the sale of real estate investment property is the Section 1031 like kind exchange. This transaction method allows you to sell a real estate investment property and reinvest in a new real estate investment property without recognizing the gain on the sale of the first property. Unfortunately, the sale of a personal residence does not qualify for Section 1031 treatment as a personal residence is not considered an investment property.
There are many considerations to think through as you plan for the tax impact on the sale of your personal residence. Taking the time to research and understand the most likely outcome for the sale of your home will prepare you to make the optimal decision for your circumstances. You should also consult with your tax advisor about your unique tax situation.
Karen Stern, CPA, (karen.stern@armaninoLLP.com), partner, Armanino, provides tax and accounting services for companies ranging from start-ups to $20 million in revenue. Prior to joining Armanino, Karen was a partner and practice leader for Brown Smith Wallace’s Entrepreneurial Services Group.