Sometimes, you have no idea that one of your clients has sold his or her home until you’re hit with the paperwork and/or surprise questions prior to a tax filing deadline. Chances are, however, that you’ve asked this question in your annual tax organizer. Whether you know in advance or you’re completely surprised by the sale, you can ease your clients’ burden – and make life easier for you as well – by imparting some important IRS guidelines to them.
Most taxpayers may think any profit gained from a sale of a home is taxable. However, the taxpayer may not necessarily have to pay tax on the money gained. Here are ten tips to help explain the details:
- Exclusion of Gain. All or part of the gain from the sale of a home may be excluded. This rule may apply if the taxpayer meets the eligibility test. Parts of the test involve ownership and use of the home. Basically, he or she must have owned and used the home as his or her main home for at least two out of the five years before the date of sale.
- Exceptions May Apply. There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication 523, Selling Your Home.
- Exclusion Limit. The most gain that can be excluded from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
- May Not Need to Report Sale. If the gain is not taxable, then there may not be a need to report the sale to the IRS on the tax return.
- When the Sale Must be Reported. The sale must be reported on the tax return if the owner can’t exclude all or part of the gain, and the sale must be reported if the owner chooses not to claim the exclusion. That’s also true if the taxpayer gets Form 1099-S, Proceeds From Real Estate Transactions.
- Exclusion Frequency Limit. Generally, the taxpayer can exclude the gain from the sale of his or her main home only once every two years. Some exceptions may apply to this rule.
- Only a Main Home Qualifies. If the person owns more than one home, he or she may only exclude the gain on the sale of the main home; the main home usually is the home lived in most of the time.
- First-time Homebuyer Credit. If your client claims the first-time homebuyer credit when he or she bought the home, special rules apply to the sale. For more on those rules, see Publication 523.
- Home Sold at a Loss. If the main home is sold at a loss, that loss cannot be deducted on the tax return.
- Report Your Address Change. After your client sells the home and moves, the address should be updated with the IRS. To do this, file Form 8822, Change of Address. Mail it to the address listed on the form’s instructions.
Editor’s note: The Intuit® ProConnect™ Tax Pro Center has several other articles with content on issues your clients are dealing with in their lives, including having children, divorce and what happens when a spouse dies. For a full list of articles, click here.