Q: How does selling your home for a profit affect the income you report and your tax liability?
A: Any gain (profit) on the sale of your home may be subject to the capital gains tax. Your gain (or loss) is determined by subtracting your cost basis from your selling price, less selling expenses. A loss on the sale of your home is not deductible on your return.
However, you may be able to exclude all or part of any gain. If this was your main home and, during the five-year period ending on the date of sale, you owned and lived in the home for at least two years, you can exclude up to $250,000 (single person) or up to $500,000 (married filing joint and both qualify). The excess amount will still be taxed at favorable capital gains rates. If you can exclude all your gain, you do not have to report the sale on your tax return unless you receive IRS Form 1099-S.
If you do not meet these tests, you may be able to exclude some of the gain if you meet certain other conditions, such as a change of place of employment or a move for health reasons. See the section called "Excluding The Gain: Reduced Maximum Exclusion" in IRS Pub 523 to find out whether you qualify for one of the exceptions.
If you need more details, you should read the entire Pub 523.
Q: I am married, and our house when sold will net about $400,000 in profit. We have lived here for 30 years. If I die before the house is sold, does my spouse lose the $250,000 exemption for me?
A: Starting in tax year 2008, an unmarried surviving spouse who hasn't remarried typically may qualify to exclude from income as much as $500,000 of the gain from the sale of the principal home, as long as the sale occurs no later than two years after the date of the other spouse's death. But this rule applies only if the couple would have met the qualifications for the $500,000 exclusion immediately before the spouse's death.
If you live in a community-property state and the home is community property, the cost basis is stepped up to fair market value on the date of death. If later sold, a realized gain would only occur if the sales proceeds were to exceed the revised cost basis.
If you do not live in a community-property state, then only the decedent's half of the house has its basis stepped up to fair market value. See IRS Publication 523 for more information.
Q: If I sell shares in a mutual fund and reinvest the proceeds in another fund from the same fund family, do I have to pay tax on any gain?
A: You are actually selling one fund and purchasing a new fund. You would need to report the sale of the shares you sold on Form 8949, Sales and Dispositions of Capital Assets. Information you report on this form gets posted to Form 1040 Schedule D. The purchase price of the new shares you bought becomes the cost basis of those shares. Your holding period for the new shares starts on the date of purchase of those new shares.
Q: Last year I had some capital losses that exceeded the $3,000 maximum allowed. How do I get to use the remaining losses?
A: You need to use the data from last year's return and complete the Capital Loss Carryover work sheet in this year's Schedule D instructions. Once the allocation between carryover long- and short-term losses is complete, you enter the short-term and long-term carryover losses on the applicable lines of Form 1040 Schedule D.
Q: I invested in a company, and now all my shares are worthless. Can I carry the loss forward to coming years, or must I claim the loss this year?
A: You must take the loss in the year that the securities became worthless. If you discover that your securities became worthless in a prior year, you are allowed to go back up to seven years to amend your tax return to obtain a refund. Normally, you may only go back three years. Please note that when a company declares bankruptcy it does not necessarily mean that the securities are worthless.
Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. See Form 8949 and its instructions.
Through the AARP Foundation Tax-Aide program, AARP Foundation is providing online tax counseling as a public service, and cannot guarantee the accuracy of the information provided. Your taxes are your responsibility. You are solely responsible for what you do in your own tax situation.
The AARP Foundation Tax-Aide Program is a volunteer-run, free tax-preparation and assistance service offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.