You know the forms: a W-2 showing your income from your employer, Form 1098 with the amount you paid in interest on a mortgage, a 1098-E if you paid interest on student loans, and Form 1099 with any amounts your received as an independent contractor or from interest on an investment, to name a few. If you sold any real estate last year, you also received a Form 1099-S at closing or will receive one.
Before your real estate transaction closed, the buyer’s attorney collected information including the contract price for your real estate transaction, the address of the real property you sold, your social security number, and your forwarding address. This is the information the buyer’s attorney uses to report to the IRS the gross proceeds from the sale of the real property you sold. The closing attorney is responsible for reporting this information to the IRS by the end of February.
For many people, their home is their biggest asset. Depending on the market and how long you owned your home, you could potentially realize a substantial profit when you sell it. The profit, or increase in value of an asset from the original purchase price, is realized when the asset is sold and is called a capital gain. Typically, when you sell an asset, you must pay taxes on any capital gains. The same is true when you sell real estate, with some caveats and exclusions.
The current tax code allows you to exclude some or all of a gain resulting from the sale of your home from capital gains tax if all of the following statements are true:
- You owned the home for at least two years in the ﬁve-year period before the sale of your home
- You lived in the home as your primary residence for at least two years in that same ﬁve-year period
- You have not already excluded the gain from another home sale in the past two years
If you meet all these conditions, you can exclude up to $250,000 of your gain if you file your taxes as a single person or up to $500,000 if you are married, filing jointly. If you do not meet the above conditions, you will likely have to pay capital gains tax and you may want to consult with a tax professional to ensure you take any deductions allowed under the tax code.
Additionally, if you plan to sell an investment property in the future, consider discussing with your real estate attorney or tax professional a 1031 like-kind exchange to delay paying capital gains taxes.
Published by Michelle Stinnett on March 6, 2017