Selling house and waiving taxes

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Brandon4454
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Joined: Tue Aug 07, 2018 8:43 am

Selling house and waiving taxes

Post by Brandon4454 »

Good Morning,

I have a house that I am selling that I bought 4 years ago for 120k and now I am selling it for 150k. I lived in the property for two years and rented it out for another 2 years.

I should not have to pay capital gains because I lived in the house for 2 years. Do I need to tell my closing company about this or is this something I declare in my taxes?

I tried asking my real estate agent but she never replied to my email.

Thanks for your help.

Brandon
livesoft
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Re: Selling house and waiving taxes

Post by livesoft »

You could read the IRS Publication on selling a home: https://www.irs.gov/pub/irs-pdf/p523.pdf

I've never sold a home, so I haven't read it.
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Silk McCue
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Re: Selling house and waiving taxes

Post by Silk McCue »

The closing company has nothing to do with how you handle the sale when you file your taxes. They don't somehow "code" the proceeds to indicate some sort of tax status.

Cheers
Topic Author
Brandon4454
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Re: Selling house and waiving taxes

Post by Brandon4454 »

Silk McCue wrote: Fri Sep 24, 2021 11:04 am The closing company has nothing to do with how you handle the sale when you file your taxes. They don't somehow "code" the proceeds to indicate some sort of tax status.

Cheers
Thanks
rgs92
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Re: Selling house and waiving taxes

Post by rgs92 »

There is something called an IRS 1099-S form (showing the proceeds from a real estate sale).
TropikThunder
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Re: Selling house and waiving taxes

Post by TropikThunder »

Brandon4454 wrote: Fri Sep 24, 2021 10:31 am Do I need to tell my closing company about this or is this something I declare in my taxes?
Are you wondering if perhaps the closing company is supposed to withhold some of the proceeds for taxes (they aren’t)? Otherwise I don’t see how they would be potentially involved.
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dodecahedron
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Re: Selling house and waiving taxes

Post by dodecahedron »

Helpful discussion here:
https://retipster.com/1099s/

Bottom line: the general rule is that when any type of real estate (i.e., land, buildings, etc.) is sold for a price in excess of $600, someone involved in the transaction has the responsibility to issue a 1099-S to the IRS notifying the IRS that the transaction has taken place, potentially resulting in gross taxable income that needs to be reported. (The parties involved can agree to stipulate who will bear that responsibility, but the point is that there is generally a duty to report such transactions to the IRS on a 1099-S.)

There is an exception to that general rule in the case of sales of primary residences, which is that IF the home seller certifies to the satisfaction of the other parties involved (buyer, closing attorneys, escrow agents, etc.) that the property being transferred clearly qualified for the home ownership exclusion due to the length of time the owner has lived in the home as their primary residence and the dollar amount of the transaction, then the other parties will not be legally obligated to issue a 1099-S.
Last edited by dodecahedron on Fri Sep 24, 2021 11:59 am, edited 2 times in total.
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dodecahedron
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Re: Selling house and waiving taxes

Post by dodecahedron »

TropikThunder wrote: Fri Sep 24, 2021 11:48 am
Brandon4454 wrote: Fri Sep 24, 2021 10:31 am Do I need to tell my closing company about this or is this something I declare in my taxes?
Are you wondering if perhaps the closing company is supposed to withhold some of the proceeds for taxes (they aren’t)? Otherwise I don’t see how they would be potentially involved.
There is generally NO tax withholding requirement on real estate sales but there is a reporting requirement (with a significant exception for sales of owner-occupied residences meeting the tax exclusion rules--see my previous post above.)
secondcor521
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Re: Selling house and waiving taxes

Post by secondcor521 »

If you do not owe tax (and it sounds like from your description you don't), then:

1. The title company may issue you a 1099-S. If they do, then I think you report the sale on your tax return as a capital gain, but you'll be able to mark down your $250K exemption amount and the result will be $0 additional tax liability.

2. The title company may not issue you a 1099-S. If they don't, then you don't report anything on your taxes.

The only thing that you might owe taxes on might be any depreciation recapture from the time it was a rental. I never remember how that works when interacting with a sale, but the instructions someone linked above should be helpful in that regard.
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celia
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Re: Selling house and waiving taxes

Post by celia »

You report the house sale and capital gains and rental info on your 2021 tax return.

The rental depreciation will increase the capital gains, but then they will be excluded since you lived in it for at least 2 of the previous 5 years.
secondcor521
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Re: Selling house and waiving taxes

Post by secondcor521 »

celia wrote: Fri Sep 24, 2021 12:04 pm You report the house sale and capital gains and rental info on your 2021 tax return.

The rental depreciation will increase the capital gains, but then they will be excluded since you lived in it for at least 2 of the previous 5 years.
I thought depreciation recapture taxes were separate and calculated first, and then capital gains were figured second. OP would avoid capital gains because of the exclusion, but I think still would owe deprecation recapture taxes. :confused
littlebird
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Re: Selling house and waiving taxes

Post by littlebird »

dodecahedron wrote: Fri Sep 24, 2021 11:54 am Helpful discussion here:
https://retipster.com/1099s/

Bottom line: the general rule is that when any type of real estate (i.e., land, buildings, etc.) is sold for a price in excess of $600, someone involved in the transaction has the responsibility to issue a 1099-S to the IRS notifying the IRS that the transaction has taken place, potentially resulting in gross taxable income that needs to be reported. (The parties involved can agree to stipulate who will bear that responsibility, but the point is that there is generally a duty to report such transactions to the IRS on a 1099-S.)

There is an exception to that general rule in the case of sales of primary residences, which is that IF the home seller certifies to the satisfaction of the other parties involved (buyer, closing attorneys, escrow agents, etc.) that the property being transferred clearly qualified for the home ownership exclusion due to the length of time the owner has lived in the home as their primary residence and the dollar amount of the transaction, then the other parties will not be legally obligated to issue a 1099-S.
Absolutely correct. The two times I sold a house in the past few years, I was asked questions which differentiated between a 1099-S sale and one that was exempt.
Chip
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Re: Selling house and waiving taxes

Post by Chip »

secondcor521 wrote: Fri Sep 24, 2021 12:23 pm
celia wrote: Fri Sep 24, 2021 12:04 pm You report the house sale and capital gains and rental info on your 2021 tax return.

The rental depreciation will increase the capital gains, but then they will be excluded since you lived in it for at least 2 of the previous 5 years.
I thought depreciation recapture taxes were separate and calculated first, and then capital gains were figured second. OP would avoid capital gains because of the exclusion, but I think still would owe deprecation recapture taxes. :confused
secondcor521 is correct. celia is not. See the worksheets in the previously referenced Pub 523 for details.

If the OP had owned the house and rented it out during the 5 year period before the sale, but PRIOR to living in the house for the required 2 years, some of the capital gain would also be taxable. See Section B of Wksht 3 in Pub 523.
fyre4ce
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Re: Selling house and waiving taxes

Post by fyre4ce »

When I sold my last house, the title company sent me a questionnaire to decide whether they were going to issue a 1099-S. It had a list of questions relating to whether the sale could be taxable. I answered no to most, but said yes that I ever used the house as a rental. So they issued a 1099-S, and they probably will for you too. But, this does not have any impact on whether the sale is taxable in any way. That all gets sorted out on your taxes, with software or your accountant. (I wouldn't advise you to do taxes yourself for a real estate transaction unless you're sure you know what you are doing.)

The gain on the home is non-taxable, but you will need to recapture depreciation you took over the two years you rented it.
TropikThunder
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Re: Selling house and waiving taxes

Post by TropikThunder »

fyre4ce wrote: Fri Sep 24, 2021 2:19 pm The gain on the home is non-taxable, but you will need to recapture depreciation you took over the two years you rented it.
You have to recapture depreciation even if you didn’t claim it, right? Meaning even if you didn’t take the expense write off, you still have to add back that amount. But it’s not my area of expertise.
fyre4ce
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Re: Selling house and waiving taxes

Post by fyre4ce »

TropikThunder wrote: Fri Sep 24, 2021 11:42 pm
fyre4ce wrote: Fri Sep 24, 2021 2:19 pm The gain on the home is non-taxable, but you will need to recapture depreciation you took over the two years you rented it.
You have to recapture depreciation even if you didn’t claim it, right? Meaning even if you didn’t take the expense write off, you still have to add back that amount. But it’s not my area of expertise.
In general yes, that's right, you have to recapture all the depreciation you "took or were allowed to take." (Ref: IRS Pub 523) However, it's not quite that simple. Here's a discussing on TurboTax boards about what happens for someone who forgot to take depreciation (which is not uncommon) on a home converted to a rental:

https://ttlc.intuit.com/community/inves ... /00/453003

Basically, it says that if the returns with missing depreciation are within the 3 year window to amend, then it's easier to just file the amended returns. If they are outside that window, you can file a Form 3115 to "change accounting method" that can go back further, but you'll need CPA help. I've never done this and can't vouch for it, although it does seem like a good idea to amend past returns (if possible) rather than to play games with the current return.

It's not exactly the same situation, but I deduct a room of our home now as a home office for my wife's business (S-corp). I asked our accountant whether the business should deduct depreciation and he said no, just the square footage percentage of property tax, interest, utilities, and maintenance. It would get too complicated to have to book-keep a room on the business's balance sheet, which are part of the corporate tax return. IRS Pub 587 gives a little more flexibility for home offices:
Depreciation

If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain equal to any depreciation you deducted (or could have deducted) for periods after May 6, 1997. This means that when figuring the amount of gain you can exclude, you must reduce the total gain by any depreciation allowed or allowable on the part of your home used for business after May 6, 1997.

If you can show by adequate records or other evidence that the depreciation you actually deducted (the allowed depreciation) was less than the amount you were entitled to deduct (the allowable depreciation), the amount you cannot exclude (and must subtract from your total gain when figuring your exclusion) is the amount you actually deducted. [emphasis added]

You do not have to reduce the gain by any depreciation you deducted (or could have deducted) for a separate structure for which you cannot exclude the allocable portion of the gain.
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