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Tax Consequences - Sale of Residence

Sale of Residence
Before selling your primary residence, it's important that you calculate your adjusted basis in the home. To do this, you take your original purchase price of the home and add improvements and other qualified costs that the IRS approves as basis additions, such as all of the following:

  • Settlement fees or closing costs
  • Legal fees
  • Title insurance
  • Construction costs if a new home was built (labor, permits, architect fees, etc)
  • Improvements to the home (fence, deck, garage, porch, bedroom, swimming pool, paving, central air, kitchen modernization, etc…)
  • Assessments for local improvements
  • Amounts spent after a casualty to restore damaged property

There can also be certain decreases to adjusted cost basis, which includes: insurance payments you received for casualty losses, payments received for granting an easement or right-of-way, depreciation of the home when used for business or rental purposes and tax credits taken for energy saving home improvements.

Selling your Home
If you sell your principal residence at a gain, up to $250,000 ($500,000 if married and filing jointly) of the gain may be excluded from income if you meet the following tests:


Test 1
You owned and occupied the home for two years out of the five-year period immediately preceding the home's date of sale.

Test 2
You did not claim an exclusion on another sale within the prior two years

Principal residence includes: primary home, mobile home, trailer, houseboat and condominium apartment used as primary residence. If the gain from the home sale is entirely excluded, then the transaction is not reported on the taxpayer's return at all. Form 1099-S is typically used by the closing agent to report the sale to the IRS.

Depreciation Recapture
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