Selling your home is a major decision. You have to make sure that you have a fair price, have your house in tip-top shape and can find a buyer. A lot of people also have sentimental equity invested into the home because of all the memories of their time in that home. One more aspect of selling your home that you should keep in mind is how selling your home affects your federal tax bill.
The most basic way it affects your tax bill is that this money is going to be considered as income. While, as essortment points out, it is possible that you can possibly get around this, remember that you only have up to 250,000 dollars in which to exclude. Anything higher than this and you have to start worrying about possible capital gains taxes.
Also remember that there are rules involving the ability to deduct this money. You have to have lived in the house for at least five years as a principal residence. This means that you cannot buy a house one year and then sell it the next while getting a deduction. The above article also does a good job of going in depth on other rules for deducting your capital gains. IRS Publication 523 is another great direct resource to use.
What happens if you have to report your sale? Well, the good news is that you only have to include any potential profit that you make on your sale. This means that if you don’t qualify for a deduction, but you only make a profit of 10,000 dollars, you only have to include that 10,000 as taxable income. That might push you a little higher into another tax bracket, but it won’t cripple you.
Keep in mind that there is no relief for a homeowner if they take a loss on the sale of the home. This is something that a seller will also have to consider when they go to sell the home. It is always a good idea to make sure that you are aware of the market value of a home before attempting to sell that home.
There is one loophole however: If you are moving because your employer asks you to, and you incur a loss on your home, your employer can make up that difference without it having to be reported.
So, how will selling your home affect your taxes? Probably not much, unless you are really selling for a steep price, or you like to sell homes quite often. Otherwise, you should remember what the limits and risks are of selling your home and how it will affect you come tax time.