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Home can be where the harbor is, along with the residential sale tax break

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Home sale prices are going through the roof in some places, meaning sellers need to be aware of the limits on how much residential sale profit is tax-free. (Photo by Jeffrey Czum)

Austin's housing market has been hot for a while, but it hit even more torrid heights earlier this year. That prompted many of my neighbors to become former neighbors.

They cashed in on their homes' escalation in value and moved. Most went to other single-family residences. Some older sellers downsized to townhouses or condos.

A few decided to take their profits and hit the highway in new, well-appointed recreational vehicles. Yes, even with today's gas prices, thanks to what they got for their homes.

And a handful took a look at Central Texas' lakes and opted for nice, new boats.

Tax definition of a home: In all these cases, their new living accommodations could still count as homes in the eyes of the Internal Revenue Service. Yes, even the boats.

Home is where the harbor is for tax purposes as long as your watercraft has a working kitchen and bathroom.

Don't take my landlubbing word for it. Tax law, per the IRS in Publication 530, Tax Information for Homeowners, says, "Your home may be a house, condominium, cooperative apartment, mobile home, houseboat, or house trailer that contains sleeping space and toilet and cooking facilities."

Having dealt with water issues in a couple basic, suburban houses, I'm not sure I'd opt for a houseboat. I did work with a woman in Washington, D.C., who lived on one she kept docked at a Potomac River marina. She loved it.

But still….

Luxury boats in international sights: Of course, if the hubby and I could afford one of the mega yachts we saw when we lived in Palm Beach Country, Florida, I might change my mind about a floating abode.

Some of those South Florida water mansions rivaled the vessels that now are part of the global effort to limit Russian President Vladimir Putin's access to funds in the wake of his country's invasion of Ukraine.

The U.S. Treasury Department and other global government agencies have imposed sanctions against Putin and many of his rich Russian pals who, they contend, use networks to hide and move money, anonymously making use of luxury assets around the globe.

In its continuing effort to stop such financial finagling, the U.S. Department of Treasury today announced that its Office of Foreign Assets Control (OFAC) is targeting several prominent Russian government officials, a close Putin associate and money manager, and a Kremlin-aligned yacht brokerage.

U.S. officials also identified several aircraft and yachts, like the one pictured below, in which sanctioned Russian elites maintain interests.

The mega yacht Flying Fox docked in August 2020 in Ibiza. You can other targeted ships and planes in the Treasury announcement, linked in the preceding paragraph. (Photo by Tom Drust via Wikipedia Commons)

OFAC identified the Flying Fox as the largest yacht currently available for charter through Monaco-based Imperial Yachts, whose CEO is a Russian and which has an office Moscow.

I particularly like the helicopter on the top deck. I wonder if it conveys when the ship sells, or is auctioned after being seized

Home sale tax tips: People who can afford luxury watercraft — and aren't under international sanctions — also probably don't worry too much about taxes. They have people to do that for them.

But all us regular folk, especially those of us in the United States who are turning a nice profit on personal real estate transactions, do need to be aware of the tax implications of home sales.

Obviously, you'll want to consult your tax adviser or attorney before closing. But below is a quick overview of tax considerations when selling a residence.

Some home sale profit is excluded from taxation. When you sell your main home and have a gain from the sale, if you're a single taxpayer, you may be able to exclude up to $250,000 of that gain from your income. Married homeowners who file joint tax returns may be able to exclude up to $500,000.

For most of us residential sellers, those threshold amounts are high enough that our home sale profits don't create any tax bills.

Homeowners excluding all the gain do not need to report the property's sale on their tax return unless they are issued a Form 1099-S, Proceeds From Real Estate Transactions. This informational tax form typically is issued when, per the form's instructions, your sale or exchange consists in whole or in part of —

  • Improved or unimproved land, including air space.
  • Inherently permanent structures, including any residential, commercial, or industrial building.
  • A condominium unit and its appurtenant fixtures and common elements, including land.
  • Stock in a cooperative housing corporation (as defined in section 216).
  • Any non-contingent interest in standing timber.

The second bullet point notwithstanding, the hubby and I have sold four residences and never got a 1099-S for any of them. We simply noted in our records that our profits didn't exceed the $500,000 exemption threshold and handed over the keys.

But if you do get such a statement, IRS Publication 523, Selling Your Home, says you must report the sale on Form 8949 even if you have no taxable gain to report. I also refer you to my earlier statement about touching base with a tax adviser.

Also note that if you happen to own multiple homes, these exclusion amounts apply only to the gain on the sale of your main home. When you sell that lake house, along with the dock for the boat on which you didn't live, you must pay taxes on the gain from that real estate sale.

You must meet home ownership and use rules. To claim the tax exclusion amount on the sale of your primary residence, you must meet ownership and use tests. Basically, during a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main residence for at least two years.

Here's a bit more of a breakdown of that 5/2 yearly requirements.

  1. You must own the house for at least two years. Married couples need to note who's on the deed. If it's just one spouse, then that owner must meet this ownership time. But both of you must live in the house the requisite length of time, two years, to pass the use test.
  2. You must live in the house as your primary residence for two of five years before you sell it. The good news here is that that the two years don't have to be consecutive. But unlike the ownership rule for a married jointly filing couple, the requirement on the time living there applies to both spouses, even if only one is the owner.

Note, too, that you can't have used this home sale tax break for at least two years. This limit was created to keep house flippers from serial selling at a rapid pace and avoiding capital gains tax on their profits.

Married couples again need to be careful here. If either spouse sold a home and used the capital gains tax exemption within the last two years, then the couple can't take advantage of it again on their jointly sold home.

Home improvements can help you stay under the exclusion limit. The key to your tax break when you sell your home is staying under the exclusion threshold. But don't be confused by those six-figure dollar amounts. They refer to the profit on your home's sale, not the price you get for it.

You figure that profit, as will all potential capital gains properties, by subtracting your home's basis from its sales amount. Your residence's basis basically is what you paid for the house plus any improvements.

That means the material upgrades you made to your house, while not being a direct tax savings when you shelled out the money to the contractor, can help you when you sell. They add to your basis, and the larger that amount is, the less your profit for tax purposes.

So keep good records of qualifying house work, such as a room addition or substantial landscaping. If you're near the tax kick-in on your home sale profit limit, those added basis costs could save you thousands in potential capital gains taxes.

There are possible exceptions to home sale profit tax rules. C'mon. We're talking taxes. You knew a disclaimer about exceptions was going to part of this post.

The various exceptions apply, for example, to persons with a disability, as well as certain members of the military, intelligence community, and Peace Corps workers.

And even if you don't qualify for the full $250,000 or $500,000 tax-free sale amount, you may qualify for a partial exclusion of your gain. This comes into play where, for example, the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.

Details on these special home sale tax break circumstances are detailed in IRS Publication 523, mentioned (and linked) earlier. Or, you got it, talk with your tax professional.

A loss on your home's sale isn't of any tax help. While nationwide there's been an increase in home values, prompting sales from coast to coast, some real estate markets didn't do as well.

If that's your situation and you had to sell your home for less than what you paid for it, adjusted basis taken into account, I'm sorry. I hope at least you got some cash and that you enjoyed the time you lived in the house.

But for tax purposes, you're out of luck. While some capital asset sale losses are deductible against gains, that's not the case with residential sales. You home sale loss is not tax deductible.

To move or stay: Most folks relocate for reasons other than taxes. But it helps to be aware of any potential tax implications any time you're even thinking about calling the moving company.

As the hubby and I deal with some home and yard work, I occasionally think we should have just sold our place when sales prices were peaking. Even if we knocked down the price so the new owners could do the work we're now dealing with, we would have made a nice profit based on what the neighbors got.

But we decided the only thing we hate more than working on the house and yard is moving. So we are, for now, staying put, but still griping about what these neighborhood sales mean to our property taxes. But that's for another blog post, specifically the one I wrote about protesting an exorbitant home value appraisal back in April when we got this year's exorbitant home value assessment.

If, however, you are selling your place, I hope the process goes smoothly, quickly, and that you get top dollar … within the $250,000/$500,000 profit tax exclusion limits, of course!

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