With the tax filing deadline just around the corner now is the perfect time to cover some of the basics involved in selling your Chicago area home. In today’s post we will cover some of our favorite tax tips specifically in regards to residential real estate. This piece is for informational purposes only and we would encourage you to discuss these items in detail with your tax professional.
For specific questions, contact a trusted tax professional, or the IRS!
Not All Profits Are Taxable
You will be able to exclude a high portion of your profits so long as certain conditions are met. Typically, you will be able to exclude $250,000 from your tax return, and up to $500,000 if filing a joint return. (However, if you sell for a loss, you won’t be able to take a deduction for that amount.)
The deduction is only available when selling your primary residence, and can only be used once every two years. To qualify for the deduction, you must have lived in the residence for at least two of the past five years.
It is important that whenever you move, your address is updated with the IRS.
Other Exclusions
If you do not meet the requirements above, you might still be able to exclude a portion of your profits from your income tax. There are many special conditions you can meet in order to receive a prorated, tax-free gain. If you need to sell because of a change in your health, a job change or other unforeseen circumstances, you will be able to write-off a portion of the profit.
Reporting the Sale
You will need to report the sale if you receive a 1099-S form from the closing agent. This form provides the IRS with information regarding the proceeds from real estate transactions. To avoid reporting, make sure that you are able to exclude all profits. Let the agent know at the time of closing that the form will not need to be issued. Even if you are able to deduct all profits, if the form is issued, you will still need to file it with the IRS… even if no money is owed.
Capital Gains Taxes
If you are selling an investment property or house you have only owned briefly, you will likely be subject to the capital gains tax. In other words, the capital gains tax rate you pay depends on the total amount of income you make that year. Capital Gains taxes are dependent on how much you make. If you have a lower income, you will pay no capital gains taxes. People in higher tax brackets can pay upwards of 20%. The total amount of time you owned the asset will also have an impact on the tax rate you will have to pay. If you own the property for less than a year your profits will be considered short term gains and you will pay your ordinary income tax rate on any profit. However, if you owned the asset for more than a year then you will be taxed at long term gains rates which are typically much lower than an ordinary income tax rate.
Deduct Selling Costs
When selling your Chicago house, you will be able to deduct any reasonable cost when selling your home. This includes the closing costs, improvements made in order to sell the house, assessments, marketing costs, agent fees and so on. Keep track of every cent you spend in an effort to sell your home. Come tax time, this can amount to major deductions!
No matter what time of the year you sell, it is always important to seek the counsel of professionals. Consult your agent, accountant, and attorney to make sure you have set up the best terms for yourself.
Don’t stress too much about taxes when putting your house up for sale in Chicago. Odds are Uncle Sam won’t be getting his hands on your profits.