Preface: “The hardest thing to understand in the world is the income tax.” – Albert Einstein
Do I Owe Tax If I Sold My House, Car, or Household Items?
If you sold your home, vehicle, furniture, or maybe household items at a garage sale or on eBay, you may be wondering if any of the money you received is taxable.
The short answer is: probably not.
Please read on if you would like to sharpen your understanding of taxable gains and learn when some of the money from sales like this may be subject to tax.
Disclaimer
The IRS treats personal-use property very differently than property used in business or for investment. In this brief article we are speaking only of personal-use property. If you purchase items for resale, keep inventory, etc., much of the following does not apply.
Understanding Basis
An important concept to understand in all computation of taxable gains is basis. Basis begins with what you originally paid for the item, including taxes and fees you paid in addition to the sticker price. Some later modifications can change the basis, but that is rarely the case for cars and smaller household items.
If you sold property for more than its basis, then you have a gain. Only the gain on a sale is taxed, not the recovery of the basis.
For example, if you paid $8 for something and sold it for $10, your gain is $2.
Once you understand this, it should be clear that you will not owe tax on most things you sell for less than you originally paid. Most personal-use property loses value through time and use and is rarely sold at a gain.
Excluding Gain on Sale of Your Home
Besides certain collector’s items, the only kind of personal-use property that is commonly sold at a gain is a home. And yet, you probably do not owe tax on the sale of your home either, as long as certain conditions are met.
The Taxpayer Relief Act of 1997 exempted from taxation the capital gains on the sale of a personal residence up to $500,000 for married couples filing jointly and up to $250,000 for everyone else. These amounts have not been adjusted for inflation.
Any amount of gain above these thresholds is taxable.
For example, a married couple that buys a house for $400,000 and sells it three years later for $950,000 will have a taxable gain of only $50,000, not $550,000. If the sale is for $900,000 or less, they will not owe any tax.
There are several requirements to check for to see if you qualify for this exclusion. Most of these requirements do not apply to most homeowners. The two most important ones are:
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- The ownership requirement. You must have owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale. For married couples filing jointly, it is enough that one spouse meets the ownership requirement to get the full exclusion amount.
- The Residence Requirement. You must have used the home as your residence for at least 24 months of the previous 5 years. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
If you meet these requirements and your gain is below the threshold, not only do you not owe tax on the sale of your home, you don’t even have to report it.
For homes, consider also that certain long-term improvements such as additional structures, etc. may increase the basis beyond its original purchase price.
Dealing with Loss
If you sold property for less than its basis, then you have a loss.
One major difference between personal-use property and business or investment property is that a loss from the sale of personal-use property cannot be deducted.
If you sell stock in a number of companies and lose money on some and gain money on others, you can net your losses against your gains. If you sell several rental properties, some at a loss and some at a gain, you can net your losses against your gains. But if you sell a lot of personal effects at a yard-sale or online, some at a loss and some at a gain, then you owe tax on the gains and you cannot use the losses to offset them.
However, this is rarely an issue since it is so seldom that personal-use property is ever sold at a gain.
Gifts and Inheritances
If you sold property that you received as a gift or inheritance, you might be worried that your basis is zero, so you owe tax on the entire amount of the sale. Not so.
When you receive property as a gift, you also receive the basis in the gift that the person who gave it to you would have had.
For example, if your uncle gives you a car that he paid $50,000 for and you sell it for $5,000, you have a $45,000 non-deductible loss, not a $5,000 taxable gain.
The treatment of inherited property is even more favorable to the recipient. The basis of inherited property is “stepped up” to its fair market value on the date of death. So the gain to you when you sell inherited property will be limited to the amount it has appreciated in value since it was left to you.
For instance, say you inherit a collector’s item that your relative paid $5 for back in the day. If, on the date of your relative’s death, the item in question is worth $1,000 on the open market, then that $1,000 is the item’s stepped-up basis to you. If you sell it for $1,001, then your taxable gain is $1, not $996.
Keep good records, know the law, don’t be afraid, and don’t pay more tax than you have to.