So You Sold Your Home, Now What?

Understanding the taxable gain exclusion on home sales Category: Your Income

If you are considering selling your home or have recently sold your home, there are possible tax consequences. The good news? Much of the gain on the sale of your home may be tax exempt. The bad news? If you sold your home at a loss, in all likelihood, there is not a deduction available to you. Here is what you need to know.

Excluded gains. You can generally exclude $250,000 of any gain on the sale of your main home ($500,000 if married filing jointly). To qualify the property must be your main home and you must have lived in it for two of the past five years prior to the sale of your property.

More than one home. If you own more than one home, your main home is the one you live in most of the time.

Limits. You may not take the gain exclusion if you used the exclusion on another home in the two years prior to the sale of your current property.

Tips to Ensure the Gain Exclusion Works for You

Know the timing. If you have used the gain exclusion in the past, be very careful about the timing of the sale of your current home. Making a mistake here could cost you a lot in additional tax.

Two homes? Plan your residency. If you have two properties, plan your living arrangements to ensure the property you sell can qualify you for the gain exclusion. You will also need evidence that your property is your main home. Keep mail, drivers license, tax returns, bank account statements, and other records that show your address as support for your residency claim.

Marriage and divorce. If you have a substantial gain and you are planning on getting married or divorced you may need to plan for the sale of your primary residence to maximize the use of the $500,000 (joint) versus the $250,000 (single) gain exclusion. Call for a planning session if this might impact your situation.

Homebuyer Credit complication. If you used the First-time Homebuyer Credit to purchase your home, you will need to plan for possible repayment of the credit. This is the case if you sell your home within 36 months of receiving the tax benefit or if you are participating in the IRS credit repayment program.

Keep track of improvements. The longer you live in a home, the more likelihood of a gain on the property when you sell it. Remember that the cost basis of your home can be increased (reducing possible gains) by the cost of improvements made over time. So develop a system to keep track of the money spent to improve your residence.

No Help for Losses?

While losses on the sale of a personal residence are not generally tax deductible, there are some things you need to know.

Insolvency. If the bank repossesses a property and debt forgiveness is involved, you will need to be aware of the tax consequences. Debt forgiveness is generally deemed income to you, unless you qualify for special foreclosure relief programs.

Disaster. If your loss is due to a disaster in a presidentially declared disaster area, there are other special tax provisions that apply.

Reducing the Cost of Higher Education

Ideas to manage your tax breaks Category: Planning With kids going off to college in September, the fact of higher educational costs is now impossible to ignore. As you or your child navigate campus, you are now in position to start navigating the possible tax implications of your new-found college expense. Outlined here are three of the more popular ways to reduce your taxes in 2012 as a result of this educational expense burden. Who Qualifies: Typically you, your spouse, or a dependent that can be claimed as an exemption on your individual tax return Qualified Expenses: Tuition and fees, course related books, supplies and equipment Common Tax Benefits: 1.   American Opportunity Credit. o    Amount of Credit: $2,500 per eligible student at an eligible institution ( 100% of initial $2,000 and 25% of the next $2,000) o    Frequency: Available for the first four years of post-secondary education o    Comments: In 2012, 40% of this credit is a “refundable” credit. This means you can receive up to $1,000 even if you owe no federal income taxes. 2.   Lifetime Learning Credit. o    Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 of eligible expenses) o    Frequency: No limit on number of years you can claim the credit o    Comments: The income limits for this credit are much lower than for the American Opportunity Credit. 3.   Student loan Interest Deduction. o    Amount of Deduction: Reduce up to $2,500 of your income subject to tax o    Frequency: Per taxpayer per year. o    Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions. Tips to Maximize your Tax Benefit The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple, eligible students, the American Opportunity may be a better choice. Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits. You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits. Gifts, bequests, or inheritances do not reduce your eligible expenses. Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return. Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts you could subject yourself to a 10% tax penalty. Remember, like most tax provisions, these benefits are all subject to income limitations. For 2012 they are: Educational Benefits: 2012 Modified Adjusted Gross Income Phase-outs Filing status American Opportunity Credit Lifetime Learning Credit Student Loan Interest Single $80,000 – 90,000 $52,000 – 62,000 $60,000 – 75,000 Married Filing Joint 160,000 – 180,000 104,000 – 124,000 120,000 – 150,000