When selling your home in Little Rock, it is important to understand how taxes impact the sale. Although most home-sale profits are now tax-free, homeowners can still take certain steps to maximize the tax benefits of selling a house in Little Rock. If you’re interested in learning how to exclude your home sale profit from your taxable income, read on! Today, we’ll cover everything you need to know about tax tips for selling your Little Rock house. As always, if you have specific questions, contact a tax professional or the IRS.
Not All Profits Are Taxable Income
If you make a profit when selling your house in Little Rock, there is a possibility that not all of the profits are taxable income. As long as certain qualifications are met, you will be able to exclude a high portion of your profits from the sale of your home in Little Rock. These include the following conditions:
- The house was your primary residence for at least two of the past five years before the date of the sale.
- The house in Little Rock was not acquired through a like-kind exchange for the last five years.
- No exclusion was claimed for the sale of a home during the past two years before the date of sale.
Once these qualifications are met, you may exclude up to $250,000 of the profits from the sale. If you are filing a joint return, you may exclude up to $500,000 of the profits. Keep in mind that when filing jointly, at least one spouse must meet the ownership requirement to exclude profits from your taxable income. As listed above, these requirements include that the spouse owned the home for at least two of the past five years. In addition to owning the property, both you and your spouse must have lived in the house for at least two of the five years before the date of sale.
Note that when selling for a loss, no tax deduction may be taken. Only homes that meet the required conditions may qualify for an exclusion of profits from the taxable income.
Homeowners May Qualify for Reduced Exclusions
For homeowners to exclude the full amount of profit from the sale, they must meet the qualifications listed above. If you fail to meet these qualifications, you may still be able to exclude a portion of the profits from your taxable income. For instance, if you lived in your house for only one year before you sold it, you may still qualify for a reduced exclusion. Although you did not pass the two-out-of-five-years residency test, a portion of the profits may be excluded if you sold the home due to certain circumstances.
Such situations include a change of employment, a divorce, or a change in health. Additionally, if you need to move to a bigger house due to a growing family, you may still qualify for reduced exclusions. When these special conditions are met, the IRS allows you to exclude a portion of your profits from the income tax.
Keep in mind that a reduced exclusion does not mean homeowners can exclude only a portion of the profit from the home sale. Simply put, a reduced exclusion means homeowners get less than the full $250,000 or $500,000 exclusion. For example, if you are filing a joint return but you only lived in the house one year before selling it, up to $250,000 of the profit may be excluded. Therefore, one-half of the full $500,000 would be excluded since the home was only lived in for one of the two-year requirements.
Not All Home Sales in Little Rock Need Reported
When selling your property in Little Rock, you may be able to sign a form stating there will be no taxable gain from the sale. Once this statement is signed, your closing agent will not need to send you a 1099-S form. Thus, you can avoid reporting the home sale on your tax return.
With this being said, if a 1099-S form is issued to you, you will need to report the sale on your tax return. Reporting the sale provides the IRS with information regarding the profits from real estate transactions. If you choose not to claim the exclusion you qualify for, the home sale will need to be reported.
Even if you were able to exclude all profits from your taxable income, you’ll need to report the sale if a form is issued. If you want to avoid reporting the sale, be sure to discuss the matter with your closing agent. By letting the agent know that the form does not need to be issued, you can avoid reporting your home sale in Little Rock.
Capital Gains Tax
When selling an investment property or home you owned for a short time, you will most likely be subject to the capital gains taxes. These taxes are dependant on your income tax bracket. Homeowners with a lower income will not need to pay capital gains taxes. On the other hand, homeowners with higher incomes may need to pay up to 20% with capital gains taxes. Additionally, high-income taxpayers are required to pay 3.8% tax on certain investment income. This includes the gain from any sale of a residence not excluded from income.
Homeowners May Need to Pay First-Time Homebuyer Credit
Depending on the dates you bought and sold your home in Little Rock, may need to pay some or all of the credit you received through the First-Time Homeowner Credit. How much credit needs returned depends on when you bought your home. If you claimed the First-Time Homebuyer Credit when you bought your home in 2008, you’ll need to pay back the amount of your credit reduced by any repayments. This rule also applies if you move within 36 months of purchasing the house in Little Rock.
There are a few circumstances that homeowners may qualify for as an exception to paying back the credit. One such circumstance is if you didn’t have a gain on the sale of your house in Little Rock. In this case, you would not need to pay back the credit from the First-Time Homebuyer Credit you claimed. To learn more about the special rules that apply, visit Publication 523 from the IRS.
Selling Costs May Be Deducted
When selling your Little Rock house, you may be able to deduct certain selling costs. Such costs include closing costs, repair costs, marketing costs, assessments, and agent fees. By keeping track of how much you spend on selling costs, you may have major deductions come tax time.
When selling a house in Little Rock, it is important to seek the advice of professionals. Whether you consult an agent, an accountant, or an attorney, seeking the counsel of professionals ensures you are well-prepared for tax season.