Michael R. Worthington: Selling a house can have consequences for your taxes

Older homeowners have been living in their houses longer rather than selling them and moving into a retirement home or an apartment. This reluctance of elderly owners to sell their homes contributes to the current housing crisis. And people are living in their homes longer because life expectancy has increased. The average life expectancy in the U.S. was 77 years in 2000, but now it's 79 years. Income taxes pay a part in the decision of older owners to hold on to their homes. Homeowners can defer income taxes on the profit from selling their homes if they buy another one. But the profit is subject to income taxes if home sellers move in with their kids, rent an apartment or enter a nursing home. This tax liability hanging over their heads makes retirees reluctant to take the final step of selling their house and moving somewhere else. When homeowners buy their first house, the cost of the purchase is their tax basis for that house. If they sell it and buy another one, they usually make a gain on the sale of the first house. But they don't have to pay income taxes on the gain because it's usually deferred, which in effect lowers the tax basis of their new house. And this cycle may continue for several more sales and purchases over the years. People may sell their home to buy another one if they take a job in another city. Or they may need a bigger house with more space for their children. Some buy nicer houses in the same city as their income rises. And houses tend to increase in value as time goes on, so each sale results in more gains which are then rolled over into their new house. You can exclude up to half a million dollars in profits from federal income taxes from selling your main home, provided you meet specific tests. You must have owned and lived in the house as your main residence for at least two out of the last five years before the sale. When retirees sell their home without buying a new house, they can exclude up to $250,000 if they file income taxes as a single taxpayer or $500,000 if they file jointly with a spouse. But given the upward trajectory of home prices and the tendency of people to buy larger, more expensive houses over time, the deferred gain can easily exceed the exclusions. But if they had lived in that last home for at least a year, they can treat the accumulated deferred profit as a long-term capital gain with a lower tax rate. And N.C. income tax laws replicate the federal tax law in regard to home sales. Instead of rolling the deferred gain into your new house, you might be better off to report income taxes on any excess profits over the tax exclusion of gain on the sale of homes. But you can only use this exclusion of capital gains once every two years, so don't get excited about making profits on real estate. Most people just roll the deferred gains from the previous home sales into the cost of the new home. But that means that you must carefully keep records of every house sale way back to your first home, because the IRS isn't going to accept your recollection as documentation for your income tax return. Whenever you are considering selling and buying homes, consult a tax professional regarding the best way to treat the transaction for income taxes and keep all the records for every sale.