Tax Implications of Buying and Selling a Home

Guest post by Philip Gvinter, Redfin real estate agent in Washington D.C.

If you bought or sold a home in 2013, congratulations! Now it’s time to do the tax paperwork. Here are five common questions I receive from my clients around tax time.

Photo via Microsoft Clip Art

Photo via Microsoft Clip Art

1. Should I choose the standard deduction or itemize?

Owning a home means that you can now deduct your property taxes and the interest you pay on your mortgage, which together can be a significant amount. But many people overestimate the value of these tax deductions, which won’t always add up to more than the standard deduction, especially if you don’t have other things you can itemize, such as charitable contributions or medical expenses.

The standard federal deduction rates for 2013 are: $12,200 for married taxpayers filing jointly; $8,950 for head of household; $6,100 for individual taxpayers; and $6,100 for married taxpayers filing separate. If your itemized deductions don’t add up to more than the amount for your filing status, you should choose the standard deduction.

2. What can I itemize?

You can deduct the interest you pay on your mortgage, points paid to lower the interest rate, property taxes and some parts of the closing costs. Check out IRS Form 1040 to see the line item deductions. There are several online calculators to help you estimate how much you can deduct, but it’s always wise to consult a certified public accountant to be sure you’re taking advantage of every possible deduction.

3. What if I sold my previous home in the same year?

Your tax on the sale will depend on whether you made a profit. You can exclude up to $250,000 in profit from the sale of your primary residence ($500,000 for married couples), which is known as a capital gains tax exclusion. There’s one big caveat: You had to have lived in the home for at least two of the previous five years; it cannot be a rental property. However, there are several exceptions to the rule, so you should review the details with an accountant. If you did not make a profit on the sale of your home, you cannot deduct a loss on your taxes.

Photo via Microsoft Clip Art

Photo via Microsoft Clip Art

4. What if the home I bought was an investment property?

The IRS treats primary residences differently than investment properties. Note that any rent that you receive is treated as taxable income, and investment properties do not qualify for the capital gains tax exclusion. The good news is that if you rent your property, there are a variety of expenses you can write off, including repairs, insurance and maintenance.

5. What if I purchased a second home that I don’t rent out?

According to IRS.gov, the mortgage interest on a second home is generally deductible if it is not an investment property. If you rent out the residence, you must use it for more than 14 days or more than 10% of the number of days you rent it out, whichever is longer. In addition, real estate taxes paid on your secondary residence are generally deductible.

For additional details, I recommend reviewing Publication 530 (2013), Tax Information for Homeowners, published on IRS.gov.

philip-gvinter-152x154About Philip Gvinter, Redfin
I have been in the real estate and mortgage business since 2005 and I truly enjoy helping my clients achieve their dreams of homeownership. My approach to doing business is simple: I work with clients in the same way that I would want any professional to treat me – be honest and work hard to meet the clients’ needs. My goal is to be a valuable resource by helping clients find the home that best meets their needs, negotiate to get the best price for that home and do whatever I can to make the experience as smooth and satisfying as possible. You can read reviews from my clients on Redfin.com.

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