Tax

You’re probably aware that when you sell your home, you may exclude up to $250,000 of your gain from tax if you’re unmarried (or married, filing separately) and $500,000 if you are married and file jointly. 

To claim the whole exclusion, you must have owned and lived in your home as your principal residence for an aggregate of at least two of the five years before the sale. You can claim the exclusion once every two years.

The home sale exclusion is one of the great tax benefits of home ownership. Many home sellers owe no tax at all when they sell their homes.

If a home sale is tax-free due to the exclusion, do you need to report the sale to the IRS on your tax return? It depends.

Your home sale may have already been reported to the IRS by your real estate agent, closing company, mortgage lender, or attorney. The IRS has a special information return for this purpose: Form 1099-S, Proceeds from Real Estate Transactions. This form lists the gross proceeds from the sale, the property address, and the closing date.

Typically, the 1099-S is issued at the home sale closing and is included in the closing documents you receive at settlement. If you received a Form 1099-S, you must report the sale on your tax return, even if your entire gain is tax-free due to the $250,000/$500,000 exclusion. Failure to do so will result in the IRS assuming that the selling price is the taxable gain (that’s a mess).

Form 1099-S need not be filed if your home sold for less than the applicable $250,000/$500,000 exclusion and you sign a certification stating that you qualified for the exclusion. You generally do this at the closing.

If Form 1099-S was not issued, the IRS does not require you to report the sale on your return. But doing so anyway can be a good idea because it can prevent the IRS from asserting that the six-year statute of limitations on audits should apply because you omitted more than 25 percent of gross income from your return.

Reporting the sale of a principal residence is not difficult. You must file IRS Form 8949, Sales and Other Dispositions of Capital Assets, with your annual return and enter your zero gain on IRS Schedule D.

If you want to discuss the sale of your home, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 4, 2025

Missing an estimated tax payment can result in non-deductible penalties. Make timely payments via IRS Direct Pay or EFTPS—secure and convenient methods to help you avoid the penalties.

Key Points

• Due dates. For tax year 2024, payment deadlines are April 15, June 17, and September 16, 2024, and January 15, 2025. For tax year 2025, payments are due April 15, June 16, and September 15, 2025, and January 15, 2026.
• Avoid penalties. Pay at least 90 percent of your current year’s tax or 100 percent of last year’s tax—or 110 percent if prior-year adjusted gross income (AGI) exceeds $150,000.
• Exceptions. Uneven income earners can use the annualized income method to align payments with earnings.
• Catch-up payments. Catching up when you miss a payment stops the penalty from accruing further but does not achieve forgiveness for the previous penalty assessed.

If you want to discuss estimated tax payments, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 29, 2025

If you buy and sell real estate, you need to know the difference between being classified for tax purposes as a real estate dealer versus a real estate investor.

• Real estate dealers are in the business of buying and selling real property—property is their inventory. 
• Real estate investors own property primarily to earn income from rents and/or long-term appreciation. Their real estate activity is not a business.

Why is this distinction important? Because dealers and investors receive very different tax treatment. As business owners, dealers pay taxes on their profits at ordinary income rates, which can be as high as 37 percent. They also pay self-employment taxes.

Real estate investors pay taxes on their profits at capital gains rates and pay no self-employment tax. If they hold their property for over one year, they pay tax at long-term capital gains rates of 0, 15, or 20 percent. They may also have to pay the 3.8 percent net investment income tax (NIIT). 

The difference in tax rates can have a big impact if you sell real property at a substantial profit. For example, if you earn a $100,000 profit from the sale of a property held for over one year, your taxes as a dealer could be as high as $51,130 (37 percent income tax + 14.13 percent self-employment tax). If you’re an investor, your taxes could be as high as $23,800 (20 percent capital gains tax + 3.8 percent NIIT). That’s a $27,330 difference.

Dealers may also not deduct depreciation, use installment sales, or defer tax through Section 1031 tax-deferred exchanges of their property.

Things are not all bad for real estate dealers. Unlike investors, they may fully deduct their losses. Investors may deduct no more than $3,000 in losses from ordinary income (after offsetting gains against losses).

Unfortunately, the tax code does not provide a definition of “real estate dealer.” Instead, the IRS and the courts look at various factors, including:

• How many of your properties do you sell, and how frequently?
• Did you buy with the intent of reselling at a profit?
• Did you improve the property to increase its resale value?
• What is the extent of your sales efforts?
• How did you acquire the property?
• How long did you hold the property before selling it?
• How much time did you spend selling the properties?
• What portion of your income comes from selling your properties?

Real estate dealers typically include (but are not limited to),

• real estate flippers—people who buy homes, fix them up, and resell them quickly; 
• real estate speculators, who buy and sell many properties each year;
• subdividers, who buy large tracts of vacant land, divide them into smaller lots, and then resell the lots piecemeal; and
• real estate developers and home builders, who construct new houses and resell them soon after completion.

To make things even more complicated, you can own some property for sale as a dealer and other property as a long-term investment. Whether you are a dealer is determined on a property-by-property basis. If you have dealer and investor properties, you should keep separate books, records, and bank accounts.

If you want to discuss your real estate properties, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 22, 2025