I am moving.
It feels weird to finally say that out loud (er, yes, the blog counts as out loud).
I have lived in my current home in Philadelphia for fourteen years: my entire adult life, more or less. In that time, I’ve stored up a whole houseful of memories. I have hosted Thanksgiving dinners in my dining room and cocktail parties on my porch. I brought my children home from the hospital to banners and balloons stretched across my front door. My kids learned to walk in this house and ride their bikes on the sidewalk out front. I wrote my first blog post while staring out the window on the third floor.
And now, we are moving on.
It has all happened so fast that I haven’t really had time for it to sink in. We haven’t even had time to list the house yet. When my husband told his friend about that last bit, his friend told us that it was too bad we couldn’t take advantage of the capital gains exemption since we wouldn’t be living in the house at the sale.
Um, what? (Yes. My husband gets his tax information from his friends. It wouldn’t do to, oh say, ask the tax attorney in the house. But I digress.)
As it turns out, there is a lot of misinformation and confusion floating around about the sale of personal real estate. Here’s a quick rundown of nine real estate tax-related myths:
- You can’t claim the capital gains exemption if you’re not living in the house at the time of sale. For some reason, many taxpayers think you have to live in your house while it’s listed in order to claim the exclusion. Nope. The exclusion – which is up to $250,000 of the gain from your income ($500,000 for married taxpayers) is available to taxpayers who have owned and lived in their home for two of the five years prior to sale. The years don’t have to be sequential: you can live in the house in year one and in year five and still qualify. However, if you’re planning on renting your home out while you’re there, it complicates things a bit and you’ll have to prorate the exclusion accordingly.
- You can’t claim the capital gains exclusion unless you’re over the age of 55. It used to be the rule that only taxpayers age 55 or older could claim an exclusion and even then, the exclusion was limited to a once in a lifetime $125,000 limit. The Taxpayer Relief Act of 1997 changed all of that. Now, age is just a number. And you can buy and sell as much as you want during your lifetime so long as the other criteria apply.
- You can’t claim the capital gains exclusion unless you invest the proceeds from your home into the purchase of a new house. Again, under the old law, if you sold a house before May 7, 1997, you could only claim the exclusion if you used the proceeds from the sale of your home to buy another house within two years; this was sometimes referred to as the “rollover rule.” This rule no longer applies. The IRS doesn’t care what you do with the proceeds from the sale (your spouse may, however, care just a little).
- You can claim the capital gains exclusion for any number of homes. You can only claim the exclusion for one house at a time. For purposes of the capital gains exclusion, the sale must be your principal residence. That means that you can’t claim the exclusion and then claim the exclusion for a vacation house or other property that use for investment purposes. However, if you sell your primary home and move into your vacation house or investment property for two years (and otherwise meet the criteria), you can take the exclusion on a subsequent sale.
- You’re stuck with a capital gain on the sale of a house since you can only offset the gain with a loss from another sale of a house. Notwithstanding the fact that you can’t claim a loss on the sale of your home (see #6), gains don’t have to match up in order to offset. You don’t have to offset gains from stocks with losses from stocks or gains from bonds with losses from bonds. The same idea is true with gains from the sale of real estate. With few exceptions, a gain is a gain is a gain.
- You can claim a capital loss if you lose money on the sale of your home. While it’s true that you must report and pay tax on capital gains from the sale of a personal residence, the converse is not true. You can never claim a capital loss on the sale of a personal residence – no matter how much it hurts.
- You can deduct the cost of painting and other improvements for the purpose of getting the house ready for sale. It can cost some money to get your house up to snuff before sale especially, as with mine, if your house rebels on principle to the idea of being sold. Expenses related to merely improving your personal residence are never deductible. There is a ray of sunshine, however: in most cases, significant repairs to your home increase your basis for purposes of calculating a gain or a loss at sale, but your run of the mill home repair expenses – even if significant – are not deductible.
- “Obamacare” imposes a 3.8% additional tax on the sale of all real estate. Under the new health care law, a Medicare tax of 3.8% will be imposed on investment/unearned income for high-income taxpayers. High-income taxpayers are those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000. Investment income includes, for this purpose, gain from the sale of your home. But wait: the $250,000 exclusion (or $500,000 for married taxpayers) still applies for purposes of the Medicare tax no matter what your income level. If your income is below the threshold, the Medicare tax does not apply. If your income is above the threshold but your gain is under the exclusion, the Medicare tax does not apply. If your income is above the threshold and the gain from the sale of your home is more than the exclusion, the Medicare tax does apply but only on the portion of the gain that’s more than the exclusion amount.
- Moving expenses are always deductible. Gosh, this would be awesome if it were true – only it’s not. You can only deduct moving expenses that are work-related and even then, there are strict rules about qualifying expenses. Moving expenses when you move for personal reasons – even if they’re really, really good personal reasons – are never deductible.
So there you go. If you’re contemplating selling your home, you should be all set. But do me a favor? Ask your tax professional if you have any additional questions – and not your drinking buddy.
Note: The TCJA made changes to many tax deductions and credits previously available to taxpayers, including moving expenses. This is applicable for the years 2018-2025.