 Internal Revenue Service IRS tax news. Important tax reminders for people selling a home. Inflation is coming. Oh, wait a second. Are we allowed to say that now? Yes, it is now permitted. No, the main gist of the IRS reminder is obviously, don't forget about taxes. The IRS is like, whoa, whoa, whoa, wait a second here. You're selling something? Something that's like really big and expensive like a house? Well, don't forget about us during the sales process. We're like your silent partner, you know? And it's not like we don't need the money. As you know, members of the current administration have developed some very expensive habits these days. They spend money like crazy. By the way, if you do come for a visit, make sure to keep your purse closed as you go through the premises. But in any case, they've been living on handouts for so long, they've got no other options for support. Have pity. IRS tax tip 2022-78, May 19th, 2022. A lot of families move during the summer. Taxpayers who are selling their home may qualify to exclude all or part of any gain from the sale from their income when filing their tax return, which is huge. So you want to make sure that you're taking a look at this and have an understanding of it if you're selling a principal residence. Here are some things that homeowners should think about when selling a home. We have the ownership and use. To claim the exclusion, the taxpayers must meet ownership and use tests. So first of all, when you're selling the home, clearly you're going to sell it for some sales price, and you might have, of course, a loan on it as well. We're not really thinking about the loan when we're calculating the gain. We're typically thinking about the sales price, but that's not it. We also have to think about the cost or adjusted basis, the difference between the sales price and the cost or the adjusted basis. The cost or the adjusted basis sometimes being complex for a principal residence because you might not have been tracking the improvements and things like that. So that's another thing you want to take a look at. But that difference is the amount that could be included as a gain, which might be subject then to an exclusion. So if it were not excluded, it would have to be income for taxes. Everything is flipped on its head. Income is bad. We don't want to have to include the income. We would like it to be excludable so that we don't have to include income on taxes. And that's where basically this big exclusion comes in for a principal residence. So then the question is, well, how do you get it? So now we got the ownership and use. These are kind of the tests that you will need during a five-year period, ending on the date of the sale. The homeowner must have owned the home and lived in it as their main home for at least two years. So two out of the five years, your main home like your principal residence gains. Taxpayers who sell the main home and have a gain from the sale may be able to exclude up to $250,000, which is huge, of the gain from their income. So we're talking about an individual $250,000 exclusion. That's not the sales price we're talking about here. We're talking about the amount you sold it for minus the adjusted basis, the amount of the gain that you would have to then report as income. So that difference is the amount that the exclusion could be possibly applied to if conditions are met. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. So now you got a joint return, which kind of makes sense. So now you got two people with the same home, they doubled the exclusion. So $500,000, again, that's not the sales price of the home. That would be the sales price minus the adjusted basis, the amount that you would possibly have to include an income that may be excludable. So homeowners excluding all the gain do not need to report the sale on their tax return unless a form 1099S was issued. Losses, some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible. So you might say, well, what would happen if I actually sold it at a loss, meaning I bought it for an amount higher than I was able to sell it for? Do I get some kind of benefit for that? No, because it's a principal residence. And notice this exclusion up top is kind of an unusual thing because it's a personal item. Because remember that usually the things that you get like a deduction for tax benefits for are the things that you had to expend money on in order to generate revenue. If you're talking about an income tax, you would think that you would be taxing people on the net income in other words, as opposed to the gross income. This is a principal residence, so it's kind of a personal residence. So this exclusion is a little bit strange, but you could see why they would put it into place. There's a couple arguments for it. One would be that obviously we would like people to be able to move. So it helps the housing market and helps people like be able to go from one home to another or move up in a home or possibly move to or downsize when that might be necessary, depending on the time of a life for an individual. And you can also make the argument that if you lived in the home for a long period of time, then you would have had gains. The house might have gone up in value over 30 years and then you sold the home in one year. But if you recognized all the gain in that one year, you would have a big tax consequence in one year, which could actually bump you up into higher tax brackets because there's a progressive tax system as opposed to if you recognize the game throughout. And that's kind of the argument for the capital gains, like why you have slower capital gain rates, because if you were to sell something and recognize all the gain in one year, then it could really kick you into higher tax brackets. But so that's kind of a capital gains argument. You got a full exclusion here, but those are kind of some of the rationales you might think of. So if you have a loss, then you don't really get a benefit for the loss. So some taxpayers experience a loss. So when their main home sells for less than what they paid for it, this loss is not deductible, they're saying. So multiple homes, taxpayers who own more than one home can only exclude the gain on the sale of their main home. So if you're talking about multiple homes, then of course, this is a huge exclusion. So now you're going to be starting to think, well, how could I take advantage of this $500,000 exclusion with real estate possibly? And if I have multiple real estates, could I sell different homes and whatnot? But it's got to be your main home. So they must pay taxes on the gain from selling any other home. So if it's different home than your main home, you got to pay taxes on it. You can imagine if you're in retirement and you have like five homes that you're renting or something like that, you might come up with some kind of plan that you're going to move into the five homes and sell them after you make them, your principal residence staying in there for at least the two years or whatever requirement. You could come up with a complex plan like that, but you got to make sure that you meet the tests to get that big exclusion. So reported sale, taxpayers who don't qualify to exclude all of the taxable gain from their income must report the gain from the sale on their home when they file their tax return. So if you don't get to exclude it, then obviously you have to report it and that wouldn't be as good. So anyone who chooses not to claim the exclusion must report the taxable gain on their tax return. Taxpayers who receive form 1099S proceeds from real estate transactions must report the sale on their tax return even if they have no taxable gain. So if you get that 1099S, that's going to go to the IRS too. So that's when you got to report it and show that you have the exclusion so the IRS knows that the transaction has taken place because they have the documentation they're going to want to match up to what you actually report. So mortgage debt, generally taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout for closure or other canceled mortgage debt on their home. Taxpayers, so if basically there's a canceled debt, meaning you owed money but for whatever reason the bank canceled it, possibly because they didn't think they were going to get paid any other way, right? So it was best on their side to cancel it. Well, now that's kind of the same thing as if they gave you the money and then you gave it back to them to cancel the debt. So it's like income in other words. So typically if you got a canceled debt, you could have an income situation for taxes. So taxpayers who had debt discharged and whole or in part on qualified principal residents can't exclude it from income unless it was discharged before January 1st, 2026 or a written agreement for the debt forgiveness was in place before January 1st, 2026. Possible exceptions. There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence, community and peace corps workers. So we have the worksheets. We've got worksheets included in publication five, two, three, sell in your home. There's a link to that here. It can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale and the excluded gain on the sale. So clearly if you're selling your home, you want to make sure that if it's a principal residence, make sure that you're in the rules for it to be a principal residence, especially if there's a gain that you're going to get on it and then make sure that you're thinking, what does a gain mean? It's not just the sales price. It doesn't really take into consideration your loan. You're going to get the money and you're going to have to pay off the mortgage. But the gain calculation is typically the sales price minus the adjusted basis, the cost of the adjusted cost. You might think about it cost and then improvements, for example. And then that the difference between those two are what you would have to include an income if you weren't subject to the exclusion. And then you want to make sure that if you can get the exclusion to wipe out, oftentimes it would wipe out that gain for many sales. Then you would like to make sure that you're qualified to do so. So there's these worksheets here that you can take a look at. There'll be a link to them and there'll be a link to this in the description.