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I am selling my house – Do I have to pay taxes on the sales price?

July 12th, 2012 Comments off
Asked to comment on the new constitution and speculate on the permanency of the newly formed United States of America, Benjamin Franklin stated that “In this world, nothing can be said to be certain, except death and taxes.”  Some 200 years later the certainty of taxation continues.


One tax imposed in the United States is the Income Tax.  The Internal Revenue Code defines “gross income” as “all income from whatever source derived.” It is not limited to earned income and includes profits earned from the sale of real property.


A seller’s income derived from the sale of real property is calculated by taking the gross amount received by the seller (in cash, trade, barter or otherwise) and deducting therefrom the cost of the real property.  This cost of the real property in tax terms is referred to as the “cost basis” and generally consists of the purchase price and the cost of any major capital improvements put into the property during the period of ownership.  For example, if a homeowner were to purchase his home for $20,000.00 and, during the term of his ownership, added a $10,000.00 extension, the cost basis in the property would be $30,000.00.  If the same homeowner were to sell this property for $100,000.00, he would have a gain or gross income of $70,000.00.


Under Section 121 of the Internal Revenue Code, some of the gain from the sale of one’s principal residence is excluded from gross income. In order to be eligible for the exclusion, a tax payer must have owned the property and used it as a principal residence for periods aggregating two years or more in the five year period prior to the date of sale.


For a single tax payer, the first $250,000.00 of gain is excluded from gross income.  In the case of married tax payers who file a joint return during the taxable year in which the sale occurred, $500,000.00 of gain is excluded from gross income.


In order to be eligible for the $500,000.00 exclusion, it is not necessary that both spouses own the property.  It is only required that one of the spouses own the property, however, the occupancy requirements must be met by both spouses.  It is also not necessary that both spouses be alive at the time of the sale, as there is a special rule for certain sales by surviving spouses. A surviving spouse will receive a $500,000.00 exclusion provided the sale occurs within two years of their spouses’ date of death and, provided that at the time of the spouses death, the parties would have been entitled to the $500,000.00 exclusion.


In general, the exclusion may only be used once every two years, but there are also exceptions to this rule if a sale is necessary “by reason of a change in place of employment, health or, to the extent provided in the regulations, unforeseen circumstances.”


Suppose you don’t have a house, but live in and own a Coop Apartment? The same rules apply. In the case of a cooperative, the ownership requirements apply to the titled holding of the stock and the use requirements apply to the occupancy of the apartment which the tax payer was entitled to occupy as a shareholder and owner of a proprietary lease.


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