I Sold Two Houses in One Year So What Are My Tax Issues?
- The first step in determining how much capital gains tax you owe is to separately calculate the tax basis for each house. The tax basis of each house is equal to the price you paid for each of them, the fees you pay at closing, such as legal fees and title insurance, plus the actual cost of home improvements you make to either house. When increasing the house's tax basis for home improvements, you must ensure that the expense either prolongs the useful life of the house or increases its market value. If it doesn't, you treat the cost as a repair, which doesn't increase tax basis.
- Once you determine the tax basis for each home, you need to separately calculate your gain or loss on each house. Simply subtract the home's tax basis from the price you sell it for to arrive at your gain or loss. To illustrate, suppose you purchase one house for $150,000, incur $3,000 of closing costs and install hardwood floors after moving in that cost $20,000. Your tax basis for the home is equal to the sum of all three expenses for $173,000. If you sell that home for $200,000 your capital gain is $27,000.
- If either of the houses you sell is your main residence, the IRS allows you to exclude some of the gain from taxation. Only one house is eligible for the exclusion and you don't have discretion to choose the house with the higher gain, unless both houses satisfy the requirement. The IRS requires that within the five-year period ending on the date of sale that you own the home and use it as your principal residence for a total of two years. If during the five-year period you live in each house for two years, only then can you choose which to use for the exclusion. As a single taxpayer, you can exclude up to $250,000 of gain; however, if you are married, file a joint return and your spouse satisfies the two-year residency requirement, the exclusion doubles to $500,000.
- The IRS requires you to report all capital asset transactions, including both houses you sell during the year, on a Schedule D attachment to your return. However, if you are eligible for the exclusion and if the gain doesn't exceed the maximum exclusion amount; you don't need to report the sale of that house. And, if you sell one house at a loss and the other at a gain, you can reduce your taxable gain on the one house by the loss you incur on the other.
