Can I offset capital gains from the sale of my house with capital loss from the sale of stocks?
I am getting divorced and we are selling our primary residence. After the $500,000 exemption, I estimate we will have to pay tax on about $300,000 worth of capital gains from the sale. However, I am carrying forward approximately $400,000 in losses from trading stocks (a combination of short- and long-term losses). Can I use those losses to cancel out the taxable gains on the sale of the house?
Let me start with some good news first. Generally speaking, you can offset your home sale capital gains with your other investment loss since the gains reported on Schedule D, Capital Gains and Losses, which is also the place where your other investment capital loss carryover shown.
Obviously, you understood the $500k exemption, but in order to use it correctly you must be married at the time and satisfy the ownership and use tests, which is you have owned and used your home as your main residence for at least two years out of the five-year period ending on the date of the sale. Based on your question, I think you know you qualify for the second requirement. However, it’s the first requirement, “married”, that can potentially cost you if you’re not careful.
Since your question states, “I’m getting divorced”, I assume the divorce is not finalized. As long as you haven’t signed the final divorce decree by 12/31/17, your filing status for the year should be “MFJ”. Any other statuses will prevent you from using the $500k exemption.
Lastly, here are a few more tips for you to calculate the capital gain. You can deduct all of your selling expenses, such as commissions, ads, legal fees and any seller-paid expenses from the selling price of the home to get to the so-called “amount realized” on the sale. Then, you need to find out your “adjusted basis” of the home, which is your original cost of the home increased by any capital improvements you made while you own the home. Now, with those two pieces of information, you should calculate your capital gain with confidence. Moreover, you may want to look up IRS Publication 523 entitled “Selling Your Home” to learn more details on claiming exclusions from your gain. Best!
If the home is jointly held you may use the losses in your stock portfolio to offset the gain, provided that you are married at the time of the sale. If you sell after the divorce, and each own half the home, then you would each have $250K in the exemption and the losses may or may not be transportable. If you are in community property state I would suggest that you discuss this with an Enrolled Agent or CPA and or lawyer to determine the consequences.
Hello – thank you for writing. The other advisors make good points, and you are all set for your plan, but I wanted to remind you and our readers that for personal 1040 taxes, the additional loss a taxpayer can deduct after netting cap gains is limited to $3,000 per year for married filing jointly (MFJ) ($1,500 for single filers). As the IRS explains in the Instructions for Schedule D: “You can deduct capital losses up to the amount of your capital gains plus $3,000 ($1,500 if married filing separately).” Sometimes people forget this rule, and it can make for an unpleasant tax experience when that happens.
In your case, using the round numbers you’ve given and assuming you are still not divorced when the home sells, you can file as MFJ and take the $500K exemption and have a cap gain from the house sale of $300K. You’ll use $300K of the trading losses to offset that gain. Then in future years you will continue to carry over the remainder of the loss of $100K for as many years as you need to until you use it up offsetting other gains. Once you are divorced and filing as a single filer, you’ll be limited to using an additional carry over of $1,500 each year rather than the $3,000 when you were married. The carry over amount is entered on loss Schedule D (on line 14 in 2016 tax forms).
Another important reminder is that losses from the sale of a home that is a personal residence can’t be used to offset stock market gains in your personal taxes. Of late, with the housing market doing so well, a loss in a home sale isn’t as frequent, but in the past when you took a loss on the sale of your home, it really hurt that the loss was not deductible.
Best wishes to you and please write back to us if we can offer more advice.
Yes, you can!
You may utilize your capital loss carryover as a deduction against the capital gain on the sale of your home. So long as you continue to track your carryover losses, regardless of being short term or long term, you can offset capital gains, such as this, in future years.
It sounds like you may also qualify to exclude up to $250,000 ($500,000 if you file a joint return) from taxation by using the applicable IRS Section 121 exemption. Generally, you qualify if you meet both the ownership and use tests. The requirement is that you must have owned and used this home as your main residence for at least two years out of the previous five-year period as of the date of the sale. Discuss this with your accountant as it relates to filing your taxes after the divorce and how that may impact your ability to utilize all or some of this exemption.
Yes, you may assuming you have calculated the gain on sale of home as per IRS rules. https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-residence-real-estate-tax-tips
As per the IRS, almost everything you own and use for personal or investment purposes is a capital asset. https://www.irs.gov/taxtopics/tc409
On the other hand, you cannot deduct the losses from the sale of your home. https://www.irs.gov/newsroom/what-if-i-sell-my-home-for-a-loss
Please note, I do not offer tax advice- you should consult a tax accountant for advice.