Now that the housing market has finally begun to stabilize in many areas and interest rates remain at historically low levels, more and more home buyers and sellers are dipping their toes back in the water.
If you're planning to sell your home, you need to understand the tax implications of selling a home as well as be aware of structural and cosmetic flaws in your home and the surrounding neighborhood that could undermine your asking price or keep the property languishing on the market for months.
- In general, if you make money on the sale, you can exclude the gain from your taxable income (as outlined below) if you've owned and used the home as your residence for two out of the past five years.
- You may be able to exclude up to $250,000 of the gain from your income ($500,000 on most joint returns).
- You are not eligible for the full exclusion if you already excluded the gain from the sale of another home during the two-year period prior to this sale.
- If you can exclude all of the gain, you don't need to report the sale on your tax return.
- Gains that cannot be excluded are taxable. You must report them on Form 1040, Schedule D, Capital Gains and Losses.
- You cannot deduct a loss from the sale of your main home.
- For more information, see IRS Publication 523, Selling Your Home, which also contains worksheets to help calculate the adjusted cost basis, gain (or loss) on the sale, and how much gain you can exclude.
Now for the more intangible demands of selling a home:
- If you're located on a busy street or the local school district is subpar, you probably won't fetch as much as for the same house in a better neighborhood. Keep that in mind when you set a price.
- If your house is the only contemporary model in a sea of colonials or if your remodeled McMansion is surrounded by two bedroom/one bathroom cottages, many buyers might be turned off. Not everyone wants to stand out from the crowd.
- If you started remodeling and didn't complete the job, many people won't want to take that on, even with a significant reduction in price.
- If you live near a power plant, landfill, closed school, cemetery or half-empty mall (or a registered sex offender lives in the neighborhood), there's not a whole lot you can do since those things are easily discoverable by prospective buyers.
- If your interior or exterior walls are painted with bold colors or textures, it might be worth toning it down with a more neutral palette.
- If you can afford it, have your home professionally staged, since they know how to maximize space and show off a home's strong points (while hiding its defects.) But if you're using your own furnishings, thin them out. Very often it's difficult for people to visualize their own furniture in someone else's elaborate design scheme.
- Mismatched appliances, cabinetry and plumbing fixtures stand out like sore thumbs. The same goes for worn floors or carpeting. Discuss with your realtor which improvements might be worth the investment.
- Make sure your yard is well-tended and has at least basic landscaping. Overgrown weeds and abandoned junk don't help your curb appeal. The same principle applies for common areas if you live in a condominium.
Sometimes the problem isn't with your own property, but with your neighbors'. For example, if there are foreclosed homes in the neighborhood, chances are they aren't being well-maintained and could be magnets for crime. Make contacts with the lenders taking over these properties so you can report problems such as vandalism, trash or overgrown yards. A couple of suggestions:
- If the lenders are unresponsive, ask the code-enforcement division of your city's building department whether they can charge fines or penalties.
- Take turns with neighbors to mow the lawn, pick up trash and remove graffiti. Anything you can do to bring up the quality of the neighborhood will improve your chance of selling.
And finally, if you bought your home during the peak of the market when lending standards were quite loose, it may well have been appraised incorrectly -- for example, claiming too much square footage or citing an added bedroom that doesn't meet local building codes. You could try appealing to the county assessor's office in hopes that they might refund past overpaid taxes, but with the financial state of many local governments, that might be a longshot.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.