August 11, 2014

Greetings! I hope this finds you well and in good spirits.

I have had a number of clients to downsize their homes recently. I suspect that this trend will continue. The following information will be useful if you plan to downsize or relocate.

A recent report found that the residential real estate market, particularly in urban locales, is getting back on track and expected to regain footing during the second half of 2014. According to the real estate brokerage Redfin, homes sales have been trending upward in eight out of the 30 markets it tracks.

If you have paid off your mortgage or have it nearly paid off, selling your home may result in a substantial  profit. But would those gains be taxable? If you have lived in your home for at least two out of the five years before you sell it, you may be able to avoid taxes on your capital gains — however, gains are capped at $250,000 for a single taxpayer; $500,000 for joint returns. If your profit is not subject to taxes, you may not have to report it on your tax return.

As a general rule, you can exclude the profit from the sale of your primary home once every two years. Your primary home is defined as the one in which you live most of the time. If you sell the home for less than you paid for it, you cannot deduct the loss on your tax return.

Taxes on a Trade
If you trade your home for another property, the transaction is treated as a sale and a purchase of a new home for tax purposes. For example, say your current home has an adjusted basis (cost) of $41,000. You trade it for $50,000 and use that amount toward a new home valued at $80,000. The taxable gain is considered $9,000 ($50,000 − $41,000=$9,000).

Taxes on a Transfer
There are special tax considerations if you transfer the title of your home to someone else, including your spouse and ex-spouse. This is common in divorce proceedings. If you transfer it to your former spouse, you generally will not have a gain or loss, even if you receive cash or other remuneration for the property. This is because both spouses are considered to be the owners.

Real Estate Taxes
With a home sale, both the seller and the buyer may be able to deduct the real estate taxes paid during the year you purchased your home. For example, if you purchased a house in 2013 and paid taxes the seller owed on the residence before prior to your purchase of it — which often occurs when a seller is delinquent — and you were not reimbursed by the seller, then the taxes are added to the basis of your home. However, if the seller did reimburse you for taxes paid on his or her behalf, then the taxes do not affect the basis (the value) of your home. The same applies to the seller when paying taxes for the purchaser of a house.

Additionally, the seller of property may deduct these taxes as an itemized item on Schedule A (Form 1040) regardless of what part of the taxes he actually paid. Conversely, the purchaser of property is treated as paying taxes beginning with the date of sale.

Closing Costs
Some closing costs are tax deductible. A number of settlement fees you paid upon closing — in addition to the purchase price — may be included as part of your cost. Some fees that may be deducted include title fees, charges for installing utility services, legal fees, recording fees, survey fees, transfer or stamp taxes, owner’s title insurance, charges for improvements or repairs and sales commissions.

New Construction
If you purchase a lot and have your house built on the property, expenses that can be included in your cost basis include the cost of the land and the amount it cost you to build the house (such as labor and materials, contractor and architect fees, building permit fees, utility meter and connection charges, legal fees, as well as your down payment and debt note — such as a first or second mortgage — that you give the seller or builder). Be aware that you may be required to subtract any points the seller pays on your behalf from your cost basis.

For more information regarding taxes on the sale of a home, download IRS Publication 523 at irs.gov or call 800-TAX-FORM (800-829-3676) to have it mailed to you.

If you have questions about any financial issue or concern don’t hesitate to call.

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