Taxation Issues Surrounding Your Residence

Helping you With Taxation Issues Surrounding Your Residence

How can I avoid tax when I sell my home?

If the adjusted basis of your home is greater than the net sales price, there is no taxable gain. If you live in your home as a “principal residence” for two out of the last five years before the date of the sale, then you may be able to avoid tax on the gain of up to $250,000 ($500,000 if married filing jointly) from the sale of your home. If you live in your home for less than two years, you may be able to avoid paying tax on a portion of the gain. Each of these conclusions assumes that you have properly accounted for the adjusted cost basis and the net sales price. Also, there are special rules for homes which were previously rented out or used for business purposes.

Are there tax consequences surrounding a home mortgage foreclosure?

If the fair market value of your home is less than the outstanding mortgage at the time the bank or mortgage company forecloses on your home, you may have taxable Cancellation of Indebtedness Income.

What is a short sale?

If a bank or mortgage holder agrees to the short sale, the homeowner will be allowed to sell their home at a loss and give the mortgage holder the proceeds of the sale. The mortgage holder may or may not agree to release the homeowner from the remaining unpaid debt. Also, this procedure may be less onerous on the homeowners’ credit report than a foreclosure. Beware that there may be taxable income if the remaining unpaid debt is forgiven.

How can I avoid tax on Cancellation of Indebtedness (COD) Income?

If your mortgage or other debt has been forgiven or you have been relieved of a portion of your debt, then you may have COD income. If you can substantiate that you were insolvent at the time of the debt forgiveness, or if the mortgage was for your “principal residence”, you may not be required to pay tax on some or all of the reduction in your debt.

Can I deduct a loss on the sale of my residence?

No. A loss on the sale of an asset used for personal purposes (as opposed to business purposes or investment) is a non-deductible loss. Personal use must be determined after thorough scrutiny of applicable IRS regulations.

What do I need to know about renting my home?

If you rent your home for less than 15 days, rental income in excess of rental expenses is not reportable or taxable.

If your personal use is greater than 14 days or 10% of the days rented AND the number of rental days exceeds 14, certain expenses are deductible only to the extent of the rental income from the property. Any rental income exceeding rental expenses is taxable.

If your personal use is less than the greater of 15 days or 10% of the rental days, all rental income is reportable and taxable and all rental expenses are deductible. This last rule is subject to the Passive Loss limitations and therefore, any such resulting net loss may not be deductible in the current year and may be required to be carried forward to a future year.

When can I deduct expenses for an office in the home?

If you own and run a business from your home as a sole proprietorship, or if your employer requires that you perform your duties at home, you may be able to deduct certain home office expenses. The office must be used exclusively and regularly as your principal place of business or a place to meet with customers in the normal course of business and, if an employee, the business use must be for the convenience of the employer when the employer does not provide office space elsewhere.

What if I have a second home used for vacation purposes? 

You may deduct the mortgage interest, subject to certain limits, and real estate taxes on a second residence on Schedule A as an itemized deduction. See above for rules related to vacation rental property.

When can I deduct depreciation on my home/residence?

If you use a portion of your home as a home office, or if you rent your home to others, you may be able to depreciate a portion of your home. See above topics related to Home Office and Residential Rental for further discussion of deductible expenses. Depreciation rules can be obtained from IRS Publication 946.