When you earn a profit on the sale of your home, the Internal Revenue Service may require you to report capital gains. In some cases, you may also owe capital gains tax. Regardless of whether your home is in a revocable trust at the time of the sale, the procedures for reporting profits are the same.
Revocable Trusts and Taxes
When you create a revocable trust, you can choose to dissolve it or remove assets at any time. For this reason, the IRS considers the property in the trust to be yours for tax purposes. Even if your home is in the trust, you can still take relevant deductions, such as the mortgage interest deduction. If you sell your home, you will report capital gains or losses as though the home were still in your name.
Determining Capital Gains
To determine the capital gain on the sale of your home, subtract the adjusted basis of your home from the amount realized in the sale. The adjusted basis is usually the price you paid for the home with adjustments to account for damages or improvements. If you received the home as a gift or inheritance, then the adjusted basis is the fair market value of the home at the time you received it with adjustments for damages or improvements. The amount realized in the sale is your selling price minus any selling expenses, such as a realtor's commission.
Excluding Capital Gains
If you are single or married filing separately, you may qualify to exclude as much as $250,000 of capital gains on the sale of the home from your taxable gains. If you are married filing jointly, you and your spouse may be able to exclude as much as $500,000. To exclude the gains, you must have lived in the home for at least two of the five years preceding its sale. You must also have owned the home for at least two of the five years preceding its sale. You cannot qualify for the exclusion if you have excluded gains for the sale of any other home in the two years prior to the sale.
Reporting the Gain
If you can exclude all of the gain on the sale of your home, you don't have to report the sale of your home or any profits you earned to the IRS. However, if you have gains that you cannot exclude, you must report them on Schedule D of Form 1040. You must also report the sale of your home on Form 8949.
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