Tag: rental property

Tax Rules for Vacation Home Rentals

Posted by Simon Filip on July 23, 2019

Get the most from your vacation home rental property by knowing the tax rules

Summer is the time of family vacations, sun, sand and beaches. It’s also the time when a vacation home may be used to generate additional cash flow through rental.

Part-time landlords need to remember that, in many cases, the Internal Revenue Service expects them to report the extra income.

Short-Term Rentals

In general, if a taxpayer rents their vacation home for fewer than 14 days out of the year, the income is tax free and the property is considered a personal residence. Under this scenario, taxpayers are not required to report any rental income on their tax return. However, expenses attributable to the rental cannot be deducted, such as cleaning fees or rental commissions.

More than 14 Rental Days

If a taxpayer’s rental days are above the 14-day threshold, the income is required to be reported. Under this scenario, a taxpayer can also deduct a variety of direct rental expenses such as licenses, advertising and rental commissions.

Other expenses such as repairs, mortgage interest, property taxes and utilities are deductible on a prorated basis based upon the number of days a taxpayer rented the home out.

Claiming Expenses on Rental Property

When filing taxes on a rental property, an individual will use IRS Schedule E: Supplemental Income and Loss. The IRS provides an extensive listing of deductions in Publication 527, however common expenses include:

Real Estate/Property Taxes
Insurance
Cleaning
Repairs and Maintenance
Depreciation
Legal and Professional Fees
Advertising
Utilities
Commissions

We’ve got your back

For additional information on the taxability of your vacation home rental, contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or (201) 655-7411.

Does Your Rental Real Estate Activity Qualify for the QBI Deduction?

Posted by Simon Filip on March 11, 2019

Knowing the requirements for Qualified Business Income (QBI) deductions can help you save taxes on your rental real estate

Does Your Rental Real Estate Activity Qualify for the QBI Deduction? The IRS recently issued guidance on the 20% tax deduction for Qualified Business Income (QBI) and rental real estate activity. Here’s what you need to know:

If all the general requirements (which vary based on your level of taxable income) are met, the deduction can be claimed for a rental real estate activity – but only if the activity rises to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.

The IRS safe harbor

Because determining whether a rental real estate enterprise meets those criteria can be difficult, the IRS has provided a safe harbor under which such an enterprise will be treated as a trade or business for purposes of the QBI deduction (IRS Notice 2019-7). For this purpose, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. Commercial and residential real estate may not be part of the same enterprise.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year for a rental real estate enterprise:

Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
250 or more hours of rental services are performed annually with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.
The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, for: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.

Rental services defined

For purposes of the safe harbor, rental services include:

Advertising to rent or lease the real estate
Negotiating and executing leases
Verifying information contained in prospective tenant applications
Collection of rent
Daily operation, maintenance, and repair of the property
Management of the real estate
Purchase of materials
Supervision of employees and independent contractors

Real estate not eligible for safe harbor

Some types of rental real estate are not eligible for the safe harbor. Real estate used by the taxpayer (including an owner or beneficiary of passthrough entity) as a residence for any part of the year is generally not eligible for the safe harbor, nor is real estate rented or leased under a triple net lease.

To qualify for the real estate safe harbor in 2019, it is important for you to maintain contemporaneous records starting with the 2019 tax year. I have listed above the information which needs to be tracked as part of the 250 hours of rental services above.

We’ve got your back

As the real estate tax guy, I’m here to assist you in all your real estate accounting matters. If you have questions about the QBI deduction as it applies to your rental real estate, you can reach me at sfilip@krscpas.com or 201.655.7411.

Investing in Foreign Real Estate? Here’s What You Need to Know

Posted by Simon Filip on December 4, 2017

Investing in Foreign Real Estate? Here’s What You Need to Know

Much is written about tax compliance and withholding imposed upon a foreign entity or person owning real estate in the United States. The fact that many U.S. taxpayers own real estate outside of the country is often disregarded.

The intent of this post is to touch upon some of the differences of which an investor or potential investor in foreign real estate should be aware.

Depreciation and foreign property holdings

One of the main differences in holding a U.S. rental property compared to a foreign rental property is depreciation. The Internal Revenue Code requires any tangible property used predominantly outside the U.S. during the year to use the Alternative Depreciation System (“ADS”). Residential rental property located in a foreign country must use ADS, resulting in depreciation over a 40 year recovery period compared to the 27.5 year recovery of U.S. residential property.

1031 exchanges aren’t allowed

I have discussed the tax deferral afforded by entering into a 1031 like-kind exchange in previous posts. However, the Internal Revenue Code does not allow taxpayers to exchange U.S. investment property for foreign investment property. U.S. property is limited to the 50 states and the District of Columbia only. Property located in U.S. territories, such as Puerto Rico, is not like-kind to property located within the United States. There are limited exceptions, under certain circumstances for property located within the U.S Virgin Islands, Guam and the Northern Mariana Islands.

Taxpayers can obtain deferral afforded by a 1031 exchange when trading U.S. property for U.S. property, but not U.S. property for foreign property. However, foreign property is deemed liked-kind when exchanged for other foreign property, thus qualifying for 1031 exchange treatment.

Preventing double taxation

If a taxpayer operates a property abroad as a rental property, taxes will be owed in the country where the property is located. To prevent double taxation, a U.S. taxpayer can claim a credit on the U.S. tax return for taxes paid to the foreign country relating to the net rental income. It is important to note that a taxpayer cannot claim a credit for more than the amount of U.S. tax on the rental income.

The foreign tax credit is also available if the property is sold and there is any capital gains tax in the foreign county.

Additional reporting obligations

A U.S. taxpayer may have additional filing obligations with their tax return as a result of the foreign rental activity.

For example, if a U.S. taxpayer establishes a foreign bank account to collect rent and the aggregate value of the account is $10,000 or more on any given day, an FBAR (Report of Foreign Bank and Financial Accounts) is required to be filed.

If the property is held in a foreign corporation, Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) is required to be filed. If the property is held in a Foreign LLC, then Form 8858 (Information Return of U.S Persons with Respect to Foreign Disregarded Entities) may be required.

We’ve got your back

Don’t go it alone if you’re an investor in foreign real estate. Contact me at sfilip@krscpas.com or 201.655.7411 for assistance with tax planning for your international holdings.

Special Tax Allowance for Rental Real Estate Activities

Posted by Simon Filip on November 20, 2017

Special Tax Allowance for Rental Real Estate Activities If a taxpayer fails to qualify as a real estate professional, losses from rental activities may still be deductible. While real estate professionals are afforded beneficial tax treatment enabling them to deduct losses from their real estate activities, real estate nonprofessionals taxpayers may still benefit.

Exception for rental real estate activities with active participation

If a taxpayer or spouse actively participated in a passive rental real estate activity, they may be able to deduct up to $25,000 of loss from the activity from nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities.

What determines active participation?

A taxpayer actively participated in a rental real estate activity if the taxpayer (and spouse) owned at least 10% of the rental property and made management decisions or arranged for others to provide services. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, and approving expenditures.

Having a property manager will not prevent a taxpayer from meeting the active participation test. A taxpayer’s lack of participation in operations does not preclude qualification as an active participant, as long as the taxpayer is still involved in a significant sense. For example, the service vendors and approving tenants must be approved by the taxpayer before the property manager can commit to a service or lease contract. In other words, the taxpayer is still treated as actively participating if they are involved in meaningful management decisions regarding the rental property.

Maximum special allowance

The maximum special allowance is:

$25,000 for single taxpayers and married taxpayers filing jointly
$12,500 for married taxpayers who file separate returns
$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified

If the taxpayer’s modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), they can deduct losses up to the amount specified above. If MAGI is more than $100,000 (more than $50,000 if married filing separately), the special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately and your MAGI). If MAGI is $150,000 or more ($75,000 if married filing separately), there is no special allowance.

Modified Adjust Gross Income (MAGI)

For purposes of calculating the special allowance for rental real estate activities, modified adjusted gross income is computed by deducting the following items from Adjusted Gross Income (AGI):

Any passive loss or passive income
Any rental losses (whether or not allowed by IRC § 469(c)(7))
IRA, taxable social security
One-half of self-employment tax
Exclusion under 137 for adoption expenses
Student loan interest
Exclusion for income from US savings bonds (to pay higher education tuition and fees)
Qualified tuition expenses (tax years 2002 and later)
Tuition and fees deduction
Any overall loss from a PTP (publicly traded partnership)

We’ve got your back

Learn about all the tax benefits you may qualify for if you invest in real estate. Contact me at sfilip@krscpas.com or 201.655.7411.

What You Ought to Know about Affordable Housing

Posted by Simon Filip on October 10, 2017

What You Ought to Know about Affordable Housing

The federal government used to build its own public housing. However, the government banned public housing construction in 1968 and began demolishing many of its buildings in the 1990s.

While the direct construction went away, the need for new units did not. The National Low Income Housing Coalition published in its 2015 report that one out of every four renter households is extremely low income (“ELI”). ELI households are those with incomes at or below 30% of area median income.

Recognizing the need for additional affordable housing, Congress developed a strategy to entice private developers to build such housing. Cognizant that developers would not pursue these projects when market-rate developments would offer higher returns, Congress included an incentive in the form of a tax credit. The National Council of State Housing Agencies (NCSHA) states nearly 3 million apartments for low-income households have been built because of the Low Income Housing Tax Credit (LIHTC). It estimates that approximately 100,000 units are added to the inventory annually.

Low Income Housing Tax Credits

The tax credits to which a developer is entitled are based on multiple factors including the investment made by the developer, the percentage of low-income units created, the type of project, and whether the project is funded by any tax-exempt private activity bonds.

Claiming the Credits

Following construction or rehabilitation and lease-up of a building, the developer submits a “placed-in-service” certificate showing it has complied with its application and project agreement. The certificate typically includes information on qualified costs incurred, the percentage of units reserved for low-income qualified tenants, and constructions agreements.

If the certificate is approved, the developer is issued IRS Form 8609. The credits can then be claimed on the federal tax return. The credit is a dollar-for-dollar reduction in federal income tax liability.

Types of Low Income Housing Projects

A common misconception is that affordable housing is required to be new construction. The LIHTC can be used for:

New construction
Acquisition and rehabilitation
Rehabilitation of a property already owned by a developer.

Affordable Housing Development Tax Implications

The low-income housing tax credit program is an option for real estate professionals seeking to develop a rental property. The tax credit will reduce Federal income taxes or can be sold for equity, reducing the debt needed to develop a project.

If developing affordable housing is part of your real estate game plan, don’t go it alone! A real estate CPA can help you devise effective tax strategies around the Low Income Housing Tax Credit program. Contact The Real Estate Tax Guy at sfilip@krscpas.com or 201.655.7411.

Real Estate Rentals, the Sharing Economy and Taxes

Posted by Simon Filip on August 31, 2017

Taxpayers renting out homes or spare rooms should be aware of the tax implications of these rentals.

When is the rental of a primary residence or vacation home taxable?

Real Estate Rentals, the Sharing Economy and Taxes The Internal Revenue Code provides the rental of a property that is also occupied by the owner (“host”) as a residence for less than 15 days during the year is not taxable. The host is considered to use the property as a residence if they use it for personal enjoyment during the tax year for more than the greater of (1) 14 days or (2) 10% of the total days during the year they rent it to others.

The tax rules are more complicated when the vacation home is used by the host for more than 2 weeks and also rented for a substantial part of the year.

For example, a host spent 60 days last year in their ski cabin in Vermont. For the remainder of the year it was rented for 180 days. The host can deduct 75% (180 days out of 240 days) of the ski cabin’s qualifying rental expenses against the rents collected. It is important to note that if expenses exceed rental income, the loss is not deductible.

Where is income from short-term rentals reported?

Many rental services, such as Airbnb, report the rental payments they send to hosts by filing IRS Form 1099-MISC. The IRS matches these 1099’s to tax returns to verify that rental income was reported.

If the host’s property is rented for more than 14 days per year, the exception noted above will not apply. Instead, the host will have to report and pay income tax on the rental income by filing IRS Schedule E along with the tax return. The host will also be allowed to deduct rental-related expenses, subject to limitations

Do hotel taxes apply to short-term rentals?

Lodging or transient occupancy taxes, which are commonly referred to as hotel taxes will typically apply to rentals of 30 days or less in some areas. Some jurisdictions will impose taxes for rentals that exceeds 30 days, such as Florida which taxes rentals of six months or less. These taxes are separate from any income tax they may be owed on profits from renting the property.

Airbnb will collect the applicable lodging taxes on behalf of its “hosts.” For instance, Airbnb has made an agreement with the Vermont Department of Taxation to collect the Vermont Meals and Rooms Tax on payments for lodging offered by its hosts. However, many other rental listing sites, such as HomeAway, will not collect the taxes for property owners. An internet search or browsing of the listing company’s website will provide their policy on collecting the taxes.

There are services available, such as Avalara’s MyLodgeTax, that assists hosts with filing and remitting their lodging taxes. These services are offered for monthly fees.

We’ve got your back

Ready to become a part of the sharing economy? If you’re considering renting out even part of your home, reach out to KRS so that we can help you stay on top of the tax rules. Contact me at sfilip@krscpas.com or (201) 655-7411.

You can also download my free Tax Tip Sheet for more ways to save taxes when buying or selling a rental property.

How Does the Net Investment Income Tax Apply to Rental Real Estate?

Posted by Simon Filip on July 17, 2017

Taxpayers should be mindful that their rental income may be subject to taxes in addition to ordinary income tax.

What is the Net Investment Income Tax?

Net Investment Income Tax and Rental Real Estate The Net Investment Income Tax (NIIT) is a surtax that took effect in 2013. The NIIT was intended to boost tax revenue from Medicare payroll taxes on earned income by broadening its reach to unearned investment income.

Net Investment Income Tax basics

The NIIT only applies to certain high-income taxpayers. Specifically, taxpayers with adjusted gross income of more than $200,000 (single filers) or $250,000 (joint filers) are subject to the surtax on investment income that exceeds the thresholds. Note that these amounts are not indexed for inflation.

NIIT imposes a 3.8% surtax on income from investments. Investments includes portfolio income items such as interest, dividends and short-term and long-term capital gains. Royalties, rental income and business income from activities that are treated as passive are also subject to the surtax. Read my post on passive activities in rental real estate to learn more.

What about self-rentals?

It is common for recipients of rental income, which include taxpayers who own rental properties directly or through pass-through entities (partnerships, LLCs or S Corporations), to also be involved with the business operations conducted on the property. The common scenario is a business owner that also owns the real estate in which he operates. The real estate is held in a separate entity that collects rents from the operating entity. Check out my previous post on IRS rules for self-rentals to learn more.

The NIIT is intended to apply to passive investment income, rather than income generated from an active trade or business. Therefore, it should not penalize a taxpayer who separates its real estate from business operations. This was clarified in an Internal Revenue Bulletin that made it clear that, if an individual derives rental income from a business activity in which the individual is materially participating, the 3.8% tax will not apply.

Does the surtax apply to real estate professionals?

While losses from real estate activities are passive per se, the losses of a real estate professional are considered ordinary losses and available to offset other ordinary income. Net rental income is generally included in the calculation of NIIT and is therefore subject to the 3.8% surtax. There is an exception if the following three conditions are met:

the taxpayer is a real estate professional
the rental activity rises to the level of trade or business; and
the taxpayer materially participates in the trade or business.

If all three of the conditions are met, the income from the rental real estate activity can be excluded from the calculation of net investment income.

What about sales of real estate?

Gains from the disposition of property (other than property held in an active trade or business) is subject to NIIT, including gain on the sale of stocks, bonds, mutual funds and real estate. The gain from the sale of rental property is also subject to NIIT unless the rental activity is part of an active trade or business.

If the real estate activity is considered a passive activity, any gain on the sale of property would generate gain that would be subject to the net investment income tax. However, if the taxpayer qualifies as a real estate professional, and the activity is considered an active trade or business, any gain on the sale of the property may be exempt from the net investment income tax. The characterization of the property for purposes of taxation of the gain on disposition is determined based on the treatment of the property during its operation.

With the 3.8% Medicare surtax on net investment income, real estate professionals should have a renewed focus on tax implications relating to their level of participation in real estate businesses.

We’ve got your back

If you’d like some additional insights into net investment income tax as it relates to real estate investments, contact me at sfilip@krscpas.com or (201) 655-7411.

How are start-up expenses treated for new rental properties?

Posted by Simon Filip on July 3, 2017

When projecting taxable income from your new rental property be mindful of start-up expenses

Expenses incurred prior to the commencement of a business are not currently deductible. In the instance of rental real estate, costs incurred before a property is ready to be rented are considered start-up expenses.

What are start-up expenses?

Start-up expenses generally fall into three categories:

Investigatory costs – amounts paid or incurred in connection with investigating the creation or acquisition of a trade or business.
Formation/organizational costs – amounts paid or incurred in creating an active trade or business.
Pre-opening expenses – amounts paid or incurred in connection with “any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business.”

How are start-up expenses treated for tax purposes?

Costs that have been identified as start-up expenses are treated differently for income tax purposes. The expenditures cannot be deducted automatically in a single year. Since these costs are deemed to provide a benefit over multiple years, they are treated as capital expenditures and must be deducted in equal amounts over 15 years. There is a special provision that allows taxpayers to deduct up to $5,000 in start-up expenses in the first year of active business, with the balance amortized over 15 years.

What about expenses to obtain a mortgage?

Certain settlement costs incurred in connection with obtaining a mortgage are required to be amortized over the life of the mortgage. Expenses such as mortgage commissions, loan processing fees, and recording fees are capitalized and amortized.

Points are charges paid by a borrower to obtain a loan or mortgage. Sometimes these charges are referred to as loan origination fees or premium charges. Points are essentially prepaid interest, but cannot be deducted in full in the year of payment. Taxpayers must amortize points over the life of the loan for their rental property.

When is a property deemed ready for rent?

There is considerable confusion about when property is ready for rent and rental activity begins for income tax purposes. It is important to establish this point in time as subsequent expenditures are no longer treated as start-up expenses requiring capitalization.

The rental activity begins when the property is ready and available for rent, not when it has actually rented. In other words, expenses incurred by the landlord while the property is vacant are not start-up expenses. For example, assume a taxpayer landlord has a vacant property that is being advertised for rental and has received a certificate of occupancy, but the landlord has not been able to find a tenant for three months. The costs incurred during that time period are not considered start-up because the property is ready and available for rent.

If a taxpayer does incur start-up expenses, they should be separated and capitalized in accordance with the Internal Revenue Code. Proper tax planning includes minimizing start-up expenses to the extent possible and/or keeping them below the $5,000 threshold.

We’ve got your back

If you have questions about start-up expenses for your new rental property, we’re here to help. Contact me at SFilip@krscpas.com or 201.655.7411.

Allocating Between Land and Building when Acquiring Rental Real Estate

Posted by Simon Filip on June 20, 2017

How purchase value is divided up between land and buildings impacts the depreciation tax benefits you get as a real estate owner. Here’s what you need to know.

Depreciation for residential and commercial properties

Apportioning costs between the land and the building for favorable tax treatment A tax benefit of real estate investing is the tax shelter provided by depreciation. Depreciation is an IRS acknowledgment that assets deteriorate over time. The IRS provides specific depreciable lives for residential and commercial property of 27.5 and 39 years, respectively. Unlike other expenses, the depreciation deduction is a paper deduction. You do not have to spend money to be entitled to an annual deduction.

Allocations favorable to taxpayers

When acquiring real estate, a taxpayer is acquiring non-depreciable land and depreciable improvements (excluding raw land, land leases, etc. for this discussion). In transactions that result in a transfer of depreciable property and non-depreciable property such as land and building purchased for a lump sum, the cost must be apportioned between the land and the building (improvements).

Land can never be depreciated. Since land provides no current tax benefit through depreciation deductions, a higher allocation to building is taxpayer-favorable. This results in the common query of how a taxpayer should allocate the purchase price between land and building. The Tax Court has repeatedly ruled that use of the tax assessor’s value to compute a ratio of the value of the land to the building is an acceptable way to allocate the cost.

For example, a taxpayer purchases a property for $1,000,000. The tax assessor’s ratios are 35/65 land to building. Using the tax assessor’s allocation the taxpayer would allocate the purchase price $350,000 and $650,000 to land and building, respectively.

Other acceptable methods used as basis for allocation include a qualified appraisal, insurance coverage on the structure (building), comparable sales of land and site coverage ratio.

Assessor’s allocation vs. taxpayer proposed values

In the recent U.S. Tax Court case, Nielsen v. Commissioner, the court concluded the county assessor’s allocation between land and improvements were more reliable than the taxpayer’s proposed values. Nielsen (the “petitioners”) incorrectly included their entire purchase price as depreciable basis, with no allocation between the improvements and the land.

When the petitioners were challenged they acquiesced and agreed the land should not have been included in their calculation of the depreciable basis. However, the petitioners challenged the accuracy of the Los Angeles County Office of the Assessor’s assessment as being inaccurate and inconsistent. Petitioners relied on alternative methods of valuation, which included the land sales method and the insurance method. The Tax Court ruled the county assessor’s allocation between land and improvement values was more reliable than the taxpayer’s proposed values.

We’ve got your back

In Nielsen vs. Commissioner, the Tax Court chose the assessor’s allocation over those provided by the taxpayers. However, facts and circumstances may not support the assessor’s allocation in all cases. It is important for a taxpayer to have reliable support and documentation to defend an allocation if it should be challenged.

If you have questions about how to allocate value between land and building, we’re here to help. Contact me at SFilip@krscpas.com or 201.655.7411.

Don’t Be Surprised by a Tax Liability on the Sale of Your Residence

Posted by Simon Filip on June 9, 2017

Tax liability on the sale of your residence Regularly, clients contact me to discuss the tax consequences of selling their primary residence. It seems there is a lot of misinformation floating around that I aim to clarify below.

Rollover proceeds from a sale

It is common for sellers who have been in their homes for quite some time to cite the “old” rollover rule. Before May 7, 1997, taxpayers could avoid paying taxes on profits from the sale of their principal residence by using the proceeds to purchase another home within two years. Sellers over age 55 had the option of a once-in-a-lifetime tax exemption of up to $125,000 of profits.

Home sale gain exclusion

Internal Revenue Code Section 121 replaced the old rollover rule and allowed taxpayers to exclude gains from the disposition of their home if certain requirements are met.

In order to qualify for the gain exclusion, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately preceding the sale. If a taxpayer has more than one home, the gain can only be excluded from the sale of their main home. In cases where there are two homes that are lived in, the main home is generally the one that is lived in the most.

If the requirements are met, taxpayers may be able to exclude up to $250,000 of gain from their income ($500,000 on a joint return) and are not obligated to reinvest the proceeds.

Sale of a multi-family home

I was recently able to provide guidance to married taxpayers who sold their property. This particular property was a side-by-side duplex where the taxpayers occupied one side as their principal residence for approximately 10 years and rented the other. The taxpayer was familiar with the $500,000 exclusion and the gross proceeds were slightly below that amount. During sales negotiations, they were incorrectly advised that the proposed sale of their principal residence with a gain under $500,000 would result in no income taxes owed after the sale. Needless to say, there was an unexpected surprise when I discussed the true income tax consequences with them.

Selling a duplex is conceptually akin to selling two separate properties. The side the taxpayers occupied is afforded the same tax treatment as any other principal residence, which includes the Section 121 gain exclusion up to $500,000 for married taxpayers. However, the investment side of the duplex is subject to capital gains tax and depreciation recapture taxes. In this particular instance, there was approximately $30,000 of combined federal and state income taxes owed as a result of the sale.

Under current law, taxpayers can sell their principal residence and exclude $250,000 of taxable gain ($500,000 for those married filing jointly). The requirements to reinvest the proceeds or to roll them into a new property have been inapplicable for some time. Taxpayers are free to use the proceeds from the sale in any manner without tainting the exclusion.

We’ve got your back

If you have additional questions about the income tax consequences of a residential sale, especially when a portion of the property has been rented out, we’re here to help. Contact me at SFilip@krscpas.com or 201.655.7411.

You can also download my free Tax Tip Sheet for more ways to save taxes when buying or selling a residential property.