GAINS AND LOSSES
- Selling an asset will result in either a gain or a loss.
- Gains from the sale of personal-use assets are usually subject to taxation.
- Losses from the sale of personal-use assets typically are not deductible.
EXCLUSION OF GAIN FROM FEDERAL AND MICHIGAN INCOME TAXATION
- Selling a principal residence (personal-use asset) generally is taxable if you realize a gain.
- However, federal tax law allows taxpayers to exclude a substantial amount of gain ($250,000 for single taxpayers and $500,000 for married taxpayers filing jointly) if you meet certain criteria. This also favorably impacts Michigan taxable income.
- The exclusion only applies to your principal residence; you can only have one principal residence.
- You must have owned the home and used it as your principal residence for at least two of the five previous years.
- You must not have excluded gain under this provision within two years prior to the sale. However, partial exclusion may be available for work-related circumstances, medical reasons or certain unforeseeable events.
- You will need to determine your basis. This is often your acquisition (or construction) cost plus major improvements. If inherited the property, the basis will often be the fair market value on the date of the decedent’s death.
- Expenses for selling the home (commissions, advertising, legal, etc.) reduce the amount realized.
- You may have received Form 1099-S, which informs you and the IRS regarding the sale proceeds.
- You must report the sale on your income tax return if:
- You have taxable gain.
- You received Form 1099-S (even if there is no taxable gain). This will preclude a letter from the IRS.
- You wish to treat the gain as taxable in order to preserve the two-year exclusion window for another qualifying property that will have greater gain.
RECAPTURE
- You may need to report some taxable gain if you used your home for business-related or income-producing purposes.
- A portion of the gain may also need to be recognized if you ever claimed a casualty loss.
- Your gain exclusion will be subject to limitations if your principal residence was formerly a vacation home.
- If you received the $7,500 first-time homebuyer credit in 2008, you will be required to repay any unpaid portion when you sell the home. This credit was analogous to a 15-year interest-free loan from the federal government.
MICHIGAN HOMESTEAD PROPERTY EXEMPTION
- Revoke the exemption on your former residence.
- Be sure to claim the exemption on your new residence.
- The title agency should catch this. However, it is good to double check. There could be big property tax implications!
ITEMIZED DEDUCTIONS
- The increased standard deduction for 2018 may preclude itemized deductions for many taxpayers.
- Nonetheless, consider the deductibility of your pro-rata real estate taxes (days owned/365). This is usually detailed on the closing statement.
- Also remember to assess the deductibility of mortgage interest reported on Form 1098.
Courtesy: Chris Harper, CPA, MBA
Hungerford Nichols & Grand Valley State University