If you sell a primary personal residence that you owned and lived in for at least 2 years (24 months) out of the 5 years leading up to the date of the sale (date of Closing) you can exclude up to $250,000 of - $500,000 if filing a joint return and both spouses owned and lived in the home for 2 out of 5 years – from federal, and probably state, income taxes. The first $250,000 or $500,000 of gain is tax-free.
The two years of residence does not have to be consecutive 12-month calendar years. If, for example, you live half of the year in the north and half of the year in a summer home four 6-month years would qualify.
To determine your “cost basis” when calculating the gain you begin with the original purchase price, less any credits provided by the seller.
If you inherited the home your basis is the fair market value (appraised value) of the property on the date of death of the person from you inherited the property. If a federal or state estate or inheritance return was filed the value of the property listed on that return is the basis.
You then add –
·
Closing
costs paid on the purchase of the home. either as part of the closing or paid
separately
·
Capital
improvements made to the property over the years
·
Closing
costs paid on the sale of the home, either as part of the closing or paid
separately
· Costs of sale you paid directly, such as advertising and marketing expenses
Closing costs that are added to basis include –
·
Abstract
or title fees
·
Charges
for installing utility services
·
Real
estate commissions
·
Legal
fees (including fees for the title search and preparing the sales contract and
deed)
·
Appraisal
and document preparation fees
·
Recording
fees
·
Survey
fees
·
Transfer
or stamp taxes
·
Title
insurance
· Mortgage points that were not deducted/deductible on Schedule A
You can include any closing costs the seller owes that you agree to pay, such as -
·
Real
estate taxes owed up through the day before the sale date
·
Back
interest owed by the seller
· The seller‘s real estate commissions and title recording or mortgage fees
· Charges for improvements or repairs that are the seller’s responsibility (i.e. lead paint removal)
IRS Publication 523 lists examples of improvements that increase the basis of the property -
Additions:
Bedroom, Bathroom, Deck, Garage, Porch, Patio
Lawn
& Grounds:
Landscaping, Driveway, Walkway, Fence, Retaining wall, Swimming pool
Systems:
Heating system, Central air conditioning, Furnace, Duct work, Central humidifier, Central vacuum, Air/water filtration systems, Wiring, Security system, Lawn sprinkler system
Exterior:
Storm windows/doors, New roof, New siding, Satellite dish
Insulation:
Attic, Walls, Floors, Pipes, and duct work
Plumbing:
Septic system, Water heater, Soft water system, Filtration system
Interior:
Built-in appliances, Kitchen modernization, Flooring, Wall-to-wall carpeting, Fireplace
If you included in your basis the cost of an energy-saving improvement and you received a tax credit or subsidy for the improvement, you must subtract the credit or subsidy from your total basis.
Special rules apply to a home acquired via a trade, in a divorce, or as a gift, a home used partly for business or rental, and a home that was foreclosed, repossessed, condemned, or abandoned. The above referenced IRS Publication 523 discusses these situations in detail.
A special calculation is also required for a surviving spouse who originally purchased the home jointly with his/her spouse. That is the subject for another post.
Once you have sold your personal residence you should send your tax professional the following items ASAP so he/she can calculate the gain on the sale during the “off-season” and be ready when you file your 2026 return –
·
The
Closing Statement for the original purchase of the home
·
The
Closing Statement for the sale of the home
·
A
list of capital improvements made to the property over the years
· A list of expenses of sale you paid directly
Any questions?
TTFN
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