Even profits made upon the sale of your home could result in tax consequences. Capital gains tax treatment concerns profits made upon the sale of specific assets and such treatment could involve the sale of your home that you owned for several decades.
The triggering of capital gains tax treatment does not occur in every sale, however. Federal law makes such a tax applicable to a qualifying primary residence where profits exceed a minimum amount. That minimum amount is $250,000 for individual homeowners and $500,000 for spouses who own a home. In other words, the sale of the home must exceed the amount of the initial price of the home by these amounts for capital gains tax treatment to apply.
Please keep in mind that the above minimum amounts only applies to the primary residence. If a homeowner sells a home that is not the primary residence, they will not be able to use these minimum amounts to shelter this income from capital gains treatment. The above minimum amounts will also not apply for the sale of investment properties, or if you have not claimed the home as your primary residence for a minimum of two of the past five years.
There are ways of reducing your tax liability. For example, you may be able to subtract the amount paid for home improvements from the profits you earn upon the sale of your residence. It is, therefore, a good idea to keep accurate records on file regarding home improvements made while you lived at the residence. You may also be able to deduct other expenses as well including prepaid interest on the mortgage, title insurance, real estate commissions, and certain administrative costs.
What should a taxpayer do?
The amount of taxes Michigan residents owe may revolve around a number of other complex tax factors as well. If you are in a lower tax bracket, there may be a reduction in your capital gains tax rate. Your marital circumstances can impact the taxes you owe. There may also be exemptions for military personnel regarding the two-year residency requirements.
Because the rules are so complex, the IRS may not always agree with the manner in which you report such gains. It, therefore, may be extremely helpful to seek legal advice regarding such matters to prevent reporting issues from arising.