Tax Questions, Answered: Home Sales and Deductions

In our latest installation of this question-and-answer series with The Tax Institute, we look at some of the common questions we get about homes and property.

Q: Are homeowner association fees ever deductible? How do you document it if so?

A: Homeowners’ association fees paid on your personal residence are not deductible. On a rental home, they would be considered a rental expense and therefore deductible. Like all rental expenses, it makes sense to keep documentation of amounts paid during the tax year.

Q: We had purchased land to build a new home on. After holding it for almost two years I accepted a job in another state. We sold both our main home and the land and rolled the proceeds from both into the purchase of a home. How do I report the sale of the land and do I need to pay capital gains since we used the proceeds to buy our existing home?

A: Up to $250,000 ($500,000 for certain joint returns) of gain from the sale of your main home may qualify to be excluded if the sale of home exclusion rules are met. To meet these rules, the following all must apply:

  • The taxpayer must have owned the residence for a period of at least two years during the five years ending on the date of the sale (commonly called the “ownership” test),
  • The taxpayer must have used the residence as a principal residence for periods adding up to at least two years within the five-year period ending on the date of the sale or exchange (commonly called the “use” test), and
  • The taxpayer cannot have used the exclusion for any residence sold or exchanged during the two-year period ending on the date of the current sale or exchange.

These rules and others are further explained in IRS Publication 523. There is no longer any requirement of rolling the gain from one home into another, and the like-kind exchange rules don’t apply to personal use property.

Assuming the vacant land wasn’t immediately next to your main home, the gain on the sale of the vacant land won’t qualify for the exclusion because there was no home on it that met the use test.

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