Profitable Sale

• There are generally two determining factors on reporting the sale of your principal residence. You must first consider any financial gain on the sale, and secondly, the number of years you lived in the home. Not all gain is taxable. If you owned and lived in the home for at least two years and the amount of your gain passes the maximum exclusion test, you may not have to pay taxable gains. According to the Internal Revenue Service, if you file as a single individual and realize a gain of over $250,000, the gain is taxable. What is tax deductible on the sale transaction are any taxes you paid on the home while you lived in it. Home sellers may incur sale expenses such as transfer and stamp taxes in addition to other incidental items. Keep track of these. The sum total of these items reduces the amount of your gain. You may also subtract the cost of any capital improvements from your gain.
  
  

Loss on Sale

• The IRS does not recognize a loss on the sale of a home as a taxable deduction. If you worked out of a home office while you owned the residence and qualify to deduct business related items, you may claim those items while you had possession of the home. Be aware of closing cost rulings. Sellers sometimes negotiate for the buyer to pay various closing costs, including points. If this is the case in the sale of your home, it is illegal for the seller to claim these as deductions.
  
  

Buyer's Deductions

• Do not assume that all closing costs are deductible. Some are, however, many of these various fees do not qualify. In a buying transaction, points, categorized as the amount a lender charges to buy down the interest rate, are legitimate tax deductions. You may also deduct any amount of the mortgage that you pre-paid prior to the closing. Additionally, any prorated taxes you covered before you legally took possession of the home are legitimate deductions.
  
  

Home Ownership

• Once you have moved in and unpacked the last box, you might wonder how owning a home affects your bottom line tax position. The interest portion of your mortgage is generally tax deductible. At year end, your lender will send you a Form 1098 which justifies the tax deduction. This also holds true if you have both a first and second mortgage on the home