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With the dwindling and tough economy, people need every cent they can lay their hands on. Home purchase or selling may be the most significant transaction that average consumers can make in their lifetimes. It is for this reason that it is crucial that you know how the transactions may affect your taxes. Home owners need to understand the financial implications, especially the tax liabilities, attached to sell of their homes. Below are some tax implications that the sale of your home may cause as well as how to cut these tax liabilities.

Capital Gains

A capital gain is the increase in value of an asset, like real estate or an investment, which adds the worth of an asset more than the original buying price. This area needs to be immensely focused on to help you establish the tax implications of the sale of your home. Since capital gains are only realized after the sale of an asset is complete, it is important to note that you may find yourself with a capital gain that has to be reported on your income tax return. The capital gains amount is taxable if it fails to make up for capital losses. The good news is that there are several ways you can employ to evade paying the taxes on capital gains accrued from the sale of your home if you understand the exceptions and exclusions that are generally accepted by the IRS.

Exceptions and Exclusions

Homeowners are allowed by the IRS to exclude up to $250,000 (and $500,000 for married couples) of the profits from the sale of their main residential homes. However, they have to meet some conditions. To begin with, they must meet the ownership test that demands that the home must have been owned for at least two years (24 months). More to that, they have to meet the use test, which requires proof that the house in question was indeed, used as your main residential place for at least two out of five years prior to its sale.

You may still qualify for partial exclusion if for some reason, you have capital gains that cannot be excluded, i.e. the amount allowed is exceeded by the gains but fail to meet the user test. A major life event like a change in employment or a doctor's recommendation suggesting you move for health reasons and unforeseen circumstances like death, divorce, or multiple births can still be used to qualify one for the partial exclusion.

Situations that Don't Warrant Exclusion

Whether you can claim exclusions or not on your tax returns to avoid paying taxes on your capital gains depends on several factors. An example that may hinder you from claiming exclusions is if you if you have receipt of the first-time buyer credit and the property is not used as the main residential home for the first 36 months of the purchase date. Remember that the credit has to be repaid.

Handling Exclusions on Tax Returns

Integrated in Publication 523, are worksheets that enable you to calculate the exact amount you may exclude from your taxes. You are further required to update your address with the IRS and United States Postal Service. To notify the IRS of the change of address, Form 8822 can be used. To ensure that you get all of the IRS correspondence regarding taxes, refunds among others, see to it that they have your exact up-to-date address.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. http://www.limonwhitaker.com Tel: 888.321.6188

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By Rob L Daniel
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