Ed Jones, who is a CPA and at the FOCUS on NoVA Real Estate team’s disposal to help out from time to time with clients. Ed addresses “The Tax Implications of Selling Your Home”.

Ed Jones:
This is a question I get asked all the time when a client of mine is selling a property or a realtor calls me up. Everything starts at what is the gain when you sell a property. The gain in selling a property is your selling price, minus what you originally paid for it, minus any improvements you’ve made, and minus any selling expenses. This is why it’s so important to keep a house file as you’re doing improvements to your house, build on, so on, because decades can pass and then you sell the house later on. So keeping that together really helps you.

Once you’ve determined the gain, the question is is it going to be taxed? A person’s primary residence has a wonderful effect in the tax code that says “a single person can have up to $250,000 of gain without paying any tax and, if you’re married, it’s $500,000. You can do this every two years. It’s a huge deal as they’re trying to make it so that most people aren’t being taxed when they sell their primary residences. You have to determine if you qualify for this. You’ll qualify for this by being your primary residence for at least the last two years and if you haven’t done it before in the last two years.

Then the question starts happening, well what if i have more than $500,000 of gain? Do I have to pay tax on it? The answer is yes. You would have to calculate out and report it on your tax return. In addition settlement companies have a requirement to report the sale if there’s a sale in excess of $500,000 to the IRS. So sometimes, even when you don’t have any gain, because of this you still need to report it to the IRS when filing your tax return or else you’re going to get a confused letter from the IRS saying “Hey we saw that you sold a house for $400,000 and we don’t see that you’ve reported it. So we’re just assuming you owe us $120,000 in tax let us know if we are right.” It’s a terrifying letter to get if you’re not a professional, I get calls about them all the time. It’s very easy to respond to, make sure you know when you need to report things.

The settlement company will give you a settlement sheet it used to be called a “HUD-1” and is now called an “ALTA Statement” or “Closing Disclosure (CD)”. Hidden on that is a whole bunch of stuff i need to get the taxes done. That might be the only place that shows what real estate taxes that you actually paid that we get to deduct on your return. There’s a whole bunch of information in there.

Essentially when selling your primary residence or your property the biggest takeaways I want you to take from this is:

1. When you buy a house set up a house file keep track of all your improvements, keep your settlement sheets there, because i might need it 20 years later to save you a lot of taxes.
2. In most cases people selling their primary residence are not going to pay any income tax but you might have a reporting requirement, especially if the property’s selling for more than $500,000 so you want to pay attention to that.
3. The settlement sheet is like a little bible. It’s critical. It is something you desperately need to keep so someone like me can look through it to make sure you’re not missing any of your deductions.

Selling gets a lot more complex when you’re selling properties that are investment properties, rental properties, or properties that you’ve inherited. There’s a lot of planning to do with real estate as it’s often a huge piece of someone’s estate when they’re trying to determine how to move stuff to other people, trying to move down a generation and to avoid taxation on it. That is its own 20-minute talk that i’m sure at some point the team will pull me in here to do. I hope this was helpful.