Buying or selling Washington DC real estate is a financial transaction. And many financial transactions have tax implications that those involved need to be aware of in order to make informed and wise decisions.
Remember that real estate agents are not tax specialists. Although they may have plenty of experience with this type of deal, the tax laws change regularly and real estate agents cannot be expected to keep up with those changes. These alterations to the existing tax law are to be expected, especially in the current economic and governing climate.
What Are the Most Common Tax Implications of a Real Estate Deal?
Selling your home may allow you to turn a profit. It is the cash in pocket that captures the attention of the IRS – and needs to be reported on your tax return. There are, however, certain allowances currently in place that may allow you to exclude some or even all of those profits.
Gathered from information posted on the IRS website, keep in mind the following considerations when selling your Washington DC real estate:
- If you have lived in the house as your main or principle residence for at least two years of the five years prior to sale, you may be entitled to an exclusion.
- If you own two or more properties, only the main residence can be excluded.
- If the exclusions eliminate or cover the profit made you do not need to report it on your income tax.
- If a profit is realized above the exclusions limits you will need to fill out a Form 1040, Schedule D covering Capital Gains and Losses.
Likelihoods In the Current Market
Today’s market conditions are not exactly conducive to gains. Most people are simply happy to sell, although there are certainly circumstances where a gain is made and the above tax implications apply. Property investors are still making gains on real estate and those who have hung onto homes or land over a long period of time may turn a profit, even in the toughest economic times.
For those real estate transactions that do not realize a profit (meaning you sell the property for less than the original purchase price), there is little to affect your taxes. Inform your tax professional while filing your return and have the figures and paperwork ready to back up the claims. More often than not it will be a non-issue.
Buyers should make sure to keep their paperwork in order, if only for the purpose of claiming the exclusion when it comes time to sell. Ask your real estate agent what types of bills and contracts are needed for future tax returns and be sure to keep their contact information handy should that day come.
Profits are a reality in the world of real estate – they may even be the goal for many buyers and sellers. There could be tax implications when selling your Washington DC real estate, but the various IRS exclusions can lower your final tax bill and allow you to keep the profits in your own wallet.