You may owe capital gains tax and net investment income tax (NIIT) if you’re selling your home, or you sold a house in 2021.
Gain Exclusion:
If you’re selling your primary residence, you may be exempted from tax of up to $250,000 ($500,000 for joint filers) on gains. To qualify for this exemption, you must pass both tests:
- During the 5-year period, you should have owned the property for at least 2 years as of the date of sale.
- During the 5-year period, the property should’ve been your primary residence for a minimum of 2 years. The period of ownership and use need not overlap.
Tax Implications of Selling a Home in the US
You may owe capital gains tax and net investment income tax (NIIT) if you’re selling your home, or you sold a house in 2021.
Gain Exclusion:
If you’re selling your primary residence, you may be exempted from tax of up to $250,000 ($500,000 for joint filers) on gains. To qualify for this exemption, you must pass both tests:
- During the 5-year period, you should have owned the property for at least 2 years as of the date of sale.
- During the 5-year period, the property should’ve been your primary residence for a minimum of 2 years. The period of ownership and use need not overlap.
In addition, you can’t use the exclusion for more than once every two years.
Gain Above the Exclusion Amount:
Any gain that doesn’t qualify for the exclusion generally will be taxed on your long-term capital gains rate, provided you owned the home for at least a year.
If you didn’t, the gain will be considered short-term and will be subjected to your ordinary-income rate.
In the case of the sale of a second home (such as a vacation home), you are not eligible for the gain exclusion. Although, if the property qualifies as a rental, it might be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like exchange. You may also be able to deduct a loss.
If you sell your principal home and you qualify to exclude up to $250,000/$500,000 of gain, then, the excluded gain isn’t subject to the 3.8% NIIT.
However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.
The NIIT applies only if your modified adjusted gross income (MAGI) exceeds:- $250,000 for married taxpayers filing jointly and surviving spouses;
- $125,000 for married taxpayers filing separately; and
- $200,000 for unmarried taxpayers and heads of household.
- Tracking of your basis – To support an accurate tax basis, keep complete records, including information about the original cost incurred and subsequent improvements, reduced by any casual losses and depreciation claimed for business purposes.
- You can’t deduct a loss – If you sell your primary residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.
The sale or exchange of your main home should be reported via Form 8949, Sale and Other Dispositions of Capital Assets, if:
- You receive a gain and do not qualify to exclude all of it,
- You receive a gain and choose not to exclude it, or
- You received a Form 1099-S
At 4i Advisory, we provide accounting, audit support, direct tax, private equity, payroll, assurance, US-India tax and sales tax services to just name a few in the United States of America. To know more information please contact us (Urvesh Patel – urvesh.patel@4iadvisory.com) and we would be happy to assist you.