Selling a house does count as income, but only if there is a gain from the sale rather than a loss, and that if gain is above the allowance for property gains in your tax return. There’s much more to it than such a generalized statement though. Staying informed as a homeowner and working with the right people can be a huge asset in the house selling process. The easiest way to get a better understanding is by looking at the house sale transaction through different lenses.
Excludable Gain
You should first know that you might be able to exclude some or all of a capital gain from the sale of a house. In the majority of cases, this “excludable gain” amount is completely separate from any other income that you receive, but the amount that may be excluded does depend on how you file your tax returns.
Filing Separately
When filing accounts as a single individual, the excludable gain from the sale of a house before it is included as income is $250,000. This applies to gain only and not the entire sale of the house, and that means that there is a very reasonable margin.
Filing Jointly
Things change when taxes are being filed jointly. In fact, the amount is doubled in the vast majority of cases, since there are two individuals using their excludable gains together. That means there’s a total of $500,000 of excludable gain before the sale of a property technically results in income.
Eligible Homes
For the house sale to be eligible for excludable gain, it has to be your main home. Otherwise, people could do this for multiple rental properties and stand to make vast amounts of tax-free income, which is something the IRS can’t allow. Instead, there are specific considerations that have to be met.
The first IRS criteria that has to be met is that the property owner must have had it for at least two years. Also, the property must have been used as the main home rather than a second home or a spare property. If you were to rent a property to live in, but own another property you rent out to others, the property you are renting is considered to be your main home. The sale of the property you are renting to others would not be eligible for excludable gain, nor would holiday homes.
Capital Investments
Another interesting aspect of when a house sale is classified as income is that any capital investments that you made to the property are taken into consideration. It isn’t just about what you bought it for, compared to what you managed to sell it for, after living in it for at least two years.
What is meant by that is that if you make any sizable renovations to your home, you can take this off your gains as a capital investment. Let’s say that you were single and were going to gain $300,000 profit from the sale of your property. Normally, $50,000 (the amount over the $250,000 threshold) would be taxable. However, if you had made $100,000 worth of renovations, such as an addition or a basement conversion, then your gain would be $200,000 in this example. And, of course, that’s under the $250,000 threshold.
Reporting The Sale
In most cases, if the gain does not fall above the threshold for your filing status or if you sold the house at a loss, you don’t have to report the sale. You do, however, have to report the sale if you are above the threshold. This is done using form 8949 or a 1099s.
It is also worth noting that the exclusion of a gain that is under the threshold is actually optional. It is up to you to decide whether or not you wish to exclude any, if not all, of the capital gain under the threshold; it is not a legal requirement to list such income.
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