The tax consequences of selling a house located in the US depend on many factors. The below doesn't apply to you if you were NOT a U.S. tax resident when the U.S house was sold.
We will attempt to briefly explain the tax rules that apply when you sell or otherwise give up ownership of a home. Per IRS guidance, if you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly. When you sell a house, you will need to 1. Determine if you have a gain or loss on the sale of your home, 2. Calculate how much of any gain is taxable, and 3. Report the transaction correctly on your tax return.
Does Your Home Sale Qualify for the Exclusion of Gain?
The tax code allows you to exclude gain when you sell your main home. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly) or a partial gain, you must meet the Eligibility Test. But first you must know certain factors such as Transfer of your home to a spouse or an ex-spouse as part of a divorce settlement (nothing to report here unless the spouse is a nonresident alien. In this case, the eligibility tests apply). You will need to know the date of sale of the home and whether the house was your principal residence, meaning your main home. An Individual has only one main home at a time, per the IRS.
Here are the eligibility tests required for full exclusion of the gain for the sale of a US home:
1. Determine whether any of the automatic disqualifications apply or not: For example, property acquired through a like-kind exchange or individual being subject to Expatriation tax;
2. Determine whether you meet the ownership requirement;
3. Determine whether you meet the residence requirement;
4. Determine whether you meet the look-back requirement;
5. Determine whether you meet one of the many exceptions to the above eligibility tests.
If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion.
If you don't meet the Eligibility Test, then your home isn’t eligible for the maximum exclusion, but you should further determine whether Your Home Qualify for a Partial Exclusion of Gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.
Gain or Loss: to determine the gain or loss, deduct your adjusted basis and the selling expenses from the selling price. The adjusted basis includes the purchase price, cost of additions and major improvements (these additions must add value or prolong the life of the house), and some fees and closing cost at the time of purchase. The adjusted basis depends on how the home is acquired (purchase, gift, inheritance, exchange, etc.)
Business or Rental of Home: The use of a full or portion of your home for business or rental purposes during your ownership may affect your gain or loss calculations. The gain from a sale of a business or rental asset that was used exclusively for business/rental is reportable and taxable. The Loss resulting from the sale of the same asset is fully deductible. If partially used for personal and business in the past, get in touch with us.
How to report the gain or loss on your home sale?
First you need to determine whether you need to report the gain from your home. This must be the case if you have a gain to report, you receive a form 1099-S, or you choose to report the gain even if it qualifies for 100% exclusion (your choice to do so hoping to sell another home within the next 2 years with higher gain). If none of the above applies, then no reporting is required on your tax return.
Gains related to business or rental use of your home must be reported on form 4797. Taxable gain related to Installment sales are reported on form 6252. Use Form 8949 to report gain from the sale or disposition of the personal use portion of your home if you can’t exclude the gain. If you expect to report a sizable gain (creating higher net tax liability of at least $1,000), you may consider paying estimated tax.
Sale of personal property in connection with the sale of your home: If you sell at a gain a personal property such as a car, furniture, boat, etc., you should report this sale as ordinary income. Loss on sale of personal property is not deductible unless it is a business asset.
Different rules apply to US Non-residents who sells a US home.
Sale of Foreign home with foreign mortgage: If you sell your principal home located outside of the U.S., consider the exchange rate gains on 1- the net gain from the sale and 2- the mortgage principal repayment.
Contact your certified public accountant at Whin Global if you have any questions on home sale whether located in the US or abroad. For any Tax questions, contact info@whinglobal.com
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