ARE YOU SELLING YOUR HOME?

    Ahhh……Summer Is Here!

     

    Summer is typically a “hot season” in the home sale market. Young families typically want to get settled in a new home before school begins in the fall, and older home sellers in northern climates want to head south before winter sets in. People who are buying a new home will need to do some serious number crunching to determine what they can afford to pay and how they will pay it. However, those of you who are home sellers will need to do some number crunching as well.

    Under current tax rules, a loss on a home sale is not deductible. On the other hand, the first $250,000 of gain on a home sale is excluded from income. What’s more, for joint filers, the exclusion is generally doubled to $500,000. However, for long-time homeowners, even those generous exclusions may not shelter all of that gain from tax. Therefore, you will need to:

    Get Back to Basis

    To properly determine gain (or loss) on the sale or exchange of a home, a taxpayer must know the basis of the home for tax purposes. And calculating basis will involve information that dates back to the time the home was purchased. Or perhaps even earlier.

    The amount of gain or loss on a sale is determined by comparing the amount realized on the sale to the adjusted basis of the home. If the amount realized is greater than the adjusted basis, the difference is a gain. If the amount realized is less than the adjusted basis, the difference is a loss.

    Cost Basis

    In most cases, the starting point for determining basis is the cost of the home. So, if a home was purchased from the builder or from a former owner, the initial cost basis includes the purchase price and certain settlement costs. The purchase price generally includes the down payment and any debt, such as mortgage or notes given to the seller in payment for the home.

    Settlement fees or closing costs associated with the purchase of the home can be added to basis. However, fees associated with a mortgage on the home (e.g., appraisal fees, costs of a credit report or mortgage insurance fees) are not added to basis. In addition, escrow amounts for payment of future liabilities are not included in the basis of the home. Some examples of settlement fees that can be added to basis include:

    • Abstract of title fees
    • Charges for installing utility services
    • Legal fees (e.g., fees for a title search and for preparing the sales contract and deed)
    • Recording fees
    • Survey costs
    • Title insurance
    • Transfer taxes

    When a home changes hands, real estate taxes for the year of the sale are apportioned between the buyer and seller based on the number of days each of them held the property during the year. The date of the sale counts as a day the property is owned by the buyer. Real estate taxes for the year of sale may increase or decrease basis, depending on how the taxes were handled at the closing. If the buyer paid taxes owed by the seller and was not reimbursed, the taxes increase the buyer’s basis of the home. If the seller paid taxes owed by the buyer and was not reimbursed, the taxes decrease the buyer’s basis of the home.

    In the case of a home that was constructed by or for the taxpayer, basis includes the cost of the land plus the construction costs. However, if the taxpayer did all or part of the construction personally, basis does not include the value of the taxpayer’s own labor or the value of any other unpaid labor. 

    Basis Other Than Cost

    Special rules apply in determining basis if a home was acquired other than by purchase or construction—for example, as a gift or inheritance or as part of a divorce settlement. In addition, a taxpayer may have a basis other than cost if a home was acquired as a replacement home in a home-sale rollover under prior law. 

    Adjustments to Basis

    A taxpayer’s basis in a home is not static. Basis may be adjusted upward or downward to reflect expenditures made in connection with the home or payments or other benefits received.

    Improvements that increase basis include:

    • Additions to the home, such an extra bedroom or bath, a family room, a deck or patio, or a garage.
    • Landscaping and other outdoor improvements, such as a new driveway or walkway, fences and walls, a sprinkler system, or a swimming pool.
    • Systems improvements, such as a new heating system, central air conditioning, a new furnace or ductwork, wiring upgrades, a septic system, a water heater or water filtration system, a satellite dish, or a security system.
    • Exterior improvements, such as new storm windows or doors, roof, siding or shutters.
    • Interior improvements, such as built-in appliances, kitchen cabinetry, flooring, wall-to-wall carpeting and insulation.

    CAUTION: Improvements that are no longer part of a home are not included in the home’s basis.

    Example: John Smith bought his home for $200,000 in 2005. In 2006, John added a deck to the home at a cost of $6,000. In 2012, John remodeled the home, which involved removal of the deck and the addition of a new covered porch. The addition and porch cost $30,000. Result: After the addition of the deck in 2006, John’s basis in the home increased to $206,000. However, after the deck was removed in 2012, it was no longer included in the home’s basis. Therefore, John’s basis for the home following the remodeling is $230,000 ($206,000 – $6,000 + $30,000).

    Some examples of repairs that do not increase basis (unless they are part of an overall renovation or remodeling) include interior or exterior painting, fixing gutters, repairing leaks or plastering, and replacing broken windowpanes.

    AND HERE ARE 11 ADDITIONAL ‘HOME SELLING’ TAX TIPS:

    1. Generally, you can exclude a gain from the sale of only one main home per two-year period.
    2. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
    3. You can choose not to exclude the gain from a sale. If you expect to sell another main home within two years, you may want to consider claiming the gain on sale of your current main home instead of excluding the gain. You can only claim an exclusion on the sale of your main home once every two years (See Tax Tip #1). Depending on your specific sale, it may be more beneficial to claim the current gain as income and use the exclusion on the future sale of your main home.
    4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S – Proceeds From Real Estate Transactions.
    5. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
    6. If you received the First-Time Homebuyer Credit when you purchased your home, you may have to pay some or all of it back.
    7. If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it; for example, when you used the property as a rental house, you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
    8. You don’t have to buy a home of greater value, or any other home, to exclude this gain.
      There are no longer any requirements to buy another home after you sell in order to exclude the gain from the sale of your home.
    9. Long-term capital gains rates are lower than the ordinary tax rates you pay on short-term gains. Long-term capital gains tax rates for 2017 are 0%, 15%, or 20%, depending on your income tax bracket. Ordinary income tax rates for 2017 range from 10% to 39.6%. High-income taxpayers must pay an additional 3.8% tax on Net Investment Income (NIIT), including any gain from the sale of a residence that is not excluded from income. For this purpose, a high-income taxpayer is a taxpayer with a Modified Adjusted Gross Income (MAGI) of more than $200,000 ($250,000 if married filing jointly or a qualifying widow(er), $125,000 if married filing separately).
    10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822 – Change of Address, to notify the IRS.
    11. Most Importantly——>If you are selling your home (or are just thinking about it) contact Solid Tax Solutions and let us help you: (845) 344-1040.

    Hey, if you like this article let us know and also take the time to look at some of the other helpful articles here at The Tax Nook and please feel free to share our blog with your family and friends.

    Until the next time….

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    HERE IS WHAT YOU SHOULD KNOW ABOUT YOUR SIDE GIG AND TAXES.

    Ahh…the ‘Side-Gig’, the ‘Side-Project’, ‘Moonlighting’, or the ‘Side-Hustle’ (NO not this Hustle). From Uber to Dogwalker.com, there are tons of ways to make some money on the side while pursuing your dream job – or just digging out of debt. If you’re hoping to pick up some extra cash with a side gig this year, here’s what you need to keep in mind on the tax side.

    1) Income is Income. It doesn’t matter if your extra income is from driving a car or trading stocks, income is reportable unless it’s otherwise excluded.

    2) Understand the Difference Between a Real Business and Just a Fun Way to Make Some Money. Income may be income but how and where it’s reported can vary depending on whether you’re engaged in a business or making money with a hobby.

    Hobbies and businesses are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income), and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income: if you spend more than you make, you’re unfortunately out of luck.

    If, however, you earn income in the pursuit of a business, you can offset the income with deductions, and you can carry losses forward or backward to other years. These are sometimes referred to as the “hobby loss rules,” and they’re important.To distinguish a real business from a hobby, the IRS looks at a lot of factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business)—so how seriously you treat your new pursuit will matter.

    3) Keep Good Records. It may seem like all good fun when you’re renting out your apartment on the weekends, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously.

    If you’re working by the hour, keep a log of your time. Save your invoices and document income: if you can stash it in a separate account, even better. When it comes to expenses, keep receipts and annotate the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). And please don’t ditch those receipts immediately after Tax Day (click here to find out how long to hold onto your tax records).

    4) You May Need to Prorate Some Expenses. Typically, you can only deduct expenses primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost: you can typically deduct the business portion of the expense.

    To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage (there are also apps that can help you do this). If at the end of the year, you find, for example, that 40% of the use was for business, then you can typically deduct 40% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline as personal {not business}, even if you swear it’s used solely for business).

    5) You May Need to Make Estimated Tax Payments.The extra few hundred dollars you earn from ads on your blog might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead.

    If you expect to owe more than $1,000 at tax time, you’ll want to make estimated tax payments. To make estimated tax payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.

    6) Consider Hiring a Tax Pro. If your tax situation becomes more complicated from your side hustle—especially since all of your income will not be reported by your employer on a W-2, you may need help. Don’t hire just on cost.

    If you have a Side-Gig or are just thinking about starting that Side Hustle, don’t get caught up in the IRS tax net.

    Solid Tax Solutions (SolidTaxSolutions.com) Can Help You!

    Give Us a Call At: (845) 344-1040.

    We Are Open Year-Round!

    Sometimes, a side hustle is just that. But if it turns out to be something more, don’t ignore the business and tax side of things.

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Business, Income Tax