10 IRS Tax Rules Every Real Estate Agent Should Know

Real estate can be a tricky business, especially when it comes to taxes and following tax law.

Of course, those problems can be avoided if you have a basic understanding of the tax code and how it relates to real estate. Issues can especially arise for people contemplating to sell their home. The gains from that sale, because it’s a primary residence, may be fully or partially excluded from your income.

Real estate professionals need to be aware of the following 10 important tips.

  1. If, during any five year period, an individual has owned and used their home as a main residence for a period of at least two years, any gain from the sale can be excluded from income. If it has only been a partial residence, it won’t qualify.
  2. If a main residence is sold, $250,000 of the individual gain, or $500,000 of the joint gain, may be excluded from income. This of course depends on the other factors covered in this article.
  3. If an individual has sold another home during the two-year period prior to the date of the current home, they will not be eligible for the full tax exclusion. You will be eligible for a partial return, however. One simple rule of thumb: Only sell one home per year if at all possible.
  4. If all of the gain can be legally excluded, it is not necessary to report the sale of the home on a tax return. This is good because it won’t raise any red flags with the IRS if you sold it for a lucrative price.
  5. If a gain cannot be excluded, however, it does need to be reported on Form 1040, Schedule D, and taxes will apply to that gain. It’s not the best situation, but it’s the law. If you ignore it, you’re risking being audited by the IRS.
  6. Obviously, a loss from the sale of a main home cannot be used as a deduction. This has been more prevalent of a problem since the 2008 recession, when the housing market crashed.
  7. If you’re having a tough time calculating your taxes, there is plenty of tax software and worksheets out there that can help you once your taxes are due. IRS Publication 523 – Selling Your Home, makes these all readily available.
  8. Individuals or couples with two homes can only exclude gains from only one of the residences. Even if both homes are occupied a portion of the year, one must be designated as the main home. Only a gain on the sale of the main home can be excluded from taxes on gains. If the other home is sold and a gain results, then no deductions are allowed. Again, this is the “one house per year” rule of thumb.
  9. If a first-time homebuyer credit has been received, there are special rules concerning the tax implications of gains. Again, IRS Publication 523 addresses these concerns. These credits help young, first-time homebuyers buy a house and were put into place to help stimulate the real estate market.
  10. Anyone who moves must be sure to update their address with the IRS. They should use Form 8822 to do this. If the IRS doesn’t have your new address, you might be sent a letter of notice. If you can’t receive that letter, you could be in trouble.

Although all information about taxable real estate gains is readily available from the IRS, real estate professionals should frequently update their knowledge about this subject to ensure they are following everything according to the books.

About the Author: Jana Olson, founder of Olson Tax Consulting, LLC, is an experienced attorney in Denver, Colorado who helps businesses and individuals resolve IRS tax problems.


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