Capital Gains Tax

You may owe capital gains tax and net investment income tax (NIIT) if you’re selling your home, or you sold a house in 2021.

Gain Exclusion:

If you’re selling your primary residence, you may be exempted from tax of up to $250,000 ($500,000 for joint filers) on gains. To qualify for this exemption, you must pass both tests:

  • During the 5-year period, you should have owned the property for at least 2 years as of the date of sale.
  • During the 5-year period, the property should’ve been your primary residence for a minimum of 2 years. The period of ownership and use need not overlap.

Tax Implications of Selling a Home in the US

You may owe capital gains tax and net investment income tax (NIIT) if you’re selling your home, or you sold a house in 2021.

Gain Exclusion:
If you’re selling your primary residence, you may be exempted from tax of up to $250,000 ($500,000 for joint filers) on gains. To qualify for this exemption, you must pass both tests:

  • During the 5-year period, you should have owned the property for at least 2 years as of the date of sale.
  • During the 5-year period, the property should’ve been your primary residence for a minimum of 2 years. The period of ownership and use need not overlap.

In addition, you can’t use the exclusion for more than once every two years.

Gain Above the Exclusion Amount:
Any gain that doesn’t qualify for the exclusion generally will be taxed on your long-term capital gains rate, provided you owned the home for at least a year.

If you didn’t, the gain will be considered short-term and will be subjected to your ordinary-income rate.

In the case of the sale of a second home (such as a vacation home), you are not eligible for the gain exclusion. Although, if the property qualifies as a rental, it might be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like exchange. You may also be able to deduct a loss.

Net Investment Income Tax (NIIT)

If you sell your principal home and you qualify to exclude up to $250,000/$500,000 of gain, then, the excluded gain isn’t subject to the 3.8% NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds:
  • $250,000 for married taxpayers filing jointly and surviving spouses;
  • $125,000 for married taxpayers filing separately; and
  • $200,000 for unmarried taxpayers and heads of household.
Two other tax considerations are:
  • Tracking of your basis – To support an accurate tax basis, keep complete records, including information about the original cost incurred and subsequent improvements, reduced by any casual losses and depreciation claimed for business purposes.
  • You can’t deduct a loss – If you sell your primary residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.
Reporting the Sale:

The sale or exchange of your main home should be reported via Form 8949, Sale and Other Dispositions of Capital Assets, if:

  • You receive a gain and do not qualify to exclude all of it,
  • You receive a gain and choose not to exclude it, or
  • You received a Form 1099-S

At 4i Advisory, we provide accounting, audit support, direct tax, private equity, payroll, assurance, US-India tax and sales tax services to just name a few in the United States of America. To know more information please contact us (Urvesh Patel – urvesh.patel@4iadvisory.com) and we would be happy to assist you.

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