You have sold your house and made a good profit
How does the exemption work?
Taxpayers who file a single return can exclude up to $250,000 of profit from capital gains tax when selling their primary personal residence, thanks to the home sale exclusion. Married taxpayers filing jointly can exclude up to $500,000 of profit.
How does the home sale exclusion work?
Capital gain or loss is the difference between the sale price and your basis in the property, which is what you paid for it plus some eligible costs. You would realize a profit of $200,000 if you bought your home for $150,000 and sold it for $350,000. You will not have to report any of this money as taxable income on your tax return if you are filing single because $200,000 is less than the $250,000 exclusion.
Calculating your basis and capital gain
The formula to calculate your profit is to subtract your basis from the sale price. Start with what you paid for the home, then add the costs you incurred in the purchase, such as title fees, inspection fees, and real estate agent commissions.
2 out of 5 years rule
Your home must be your primary residence, not an investment property, to qualify for the home sale exclusion. You must have owned and used the home for at least two years of the last five years immediately before the sale date. The two years do not have to be consecutive, and you do not have to live in it on the date of sale. This is also referred to as the “residency test.”
Exceptions to the 2 out of 5 years rule
You may be able to exclude a portion of the gain if you lived in your home for less than 24 months but meet one of the special circumstances, such as a change in employment, health-related move, or an unforeseen event. You can calculate and request a partial exclusion for the home sale based on the actual time you lived in the home if you qualify under one of the special rules. Calculate the number of months you were in the home and then divide that number by 24. Multiply this fraction by $250,000, or $500,000 if you are married, and you will qualify for the double exclusion. The result is the amount you can exclude from your taxable income.
Other exceptions and rules for the exclusion
You must own the property for at least two years of the last five years. You can own it during the time you do not live in it, or you can live in it for a period without actually owning it. Military service members can suspend the regular period for up to 10 years when they are on extended official duty at least 50 miles away from their homes, and they live in government-provided housing.
Reporting the gain
Any gain from selling your home is reported on Schedule D (Form 1040) as a capital gain if the profit exceeds the exclusion limits, or if you do not meet the exclusion. The gain is reported as a short-term capital gain if you owned your home for one year or less. It is reported as a long-term capital gain if you owned the property for more than one year. Short-term gains are taxed at the same rate as your ordinary income, and long-term capital gain rates are more favorable: 0%, 15%, or 20%, depending on your taxable income. The IRS indicates that most taxpayers do not pay more than the 15% rate.
What about foreclosure or short sale?
It is unlikely to produce a gain from the unfortunate circumstances that lead to your bank foreclosing on your mortgage or agreeing to a short sale. However, either of these events may result in taxable income if your bank also “forgives” or cancels any remaining balance on the mortgage after the property is sold. Consult a tax professional.
/>Source: https://www.thebalancemoney.com/sale-of-your-home-3193496
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