What Are the Tax Implications of Selling a Home?

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Wouldn’t it be nice if you could just sell your house and walk away with all the money you made? We wish home sales always went that way, but like it or not, there are tax implications that come along with post-sale profits. 

Before you sell a home, it’s important to understand what the tax implications of selling a house are — and who can help you figure them out. 

Don’t worry, under certain circumstances you may not need to pay capital gains taxes at all. We’ll break down what your options may be, which depends a lot on how much profit you make.  

Do you have to pay taxes on a home sale? 

The tax implications of selling a home depend on a variety of factors, such as the sale price, how long you lived in the home, and if you’re married or not. We’re going to break down what these factors are further, but first, let’s look at the type of tax you will pay when you sell a home. 

When it comes to home sales, you pay capital gains taxes on the difference between what you paid for the home (your basis) and the price you sell it for. 

Fortunately, the IRS allows some exclusions on capital gains, so you won’t pay taxes on the full amount. 

  • If you’re single: You can exclude $250,000 of capital gains on real estate sales.
  • If you’re married and filing jointly: You can exclude $500,000 of capital gains on real estate sales. 

So let’s say you bought a house 20 years ago at a price of $300,000 and today you sell that home for $900,000. You would make $600,000 on the sale. 

If you’re married, that means that $500,000 out of that $600,000 would not be subject to capital gains tax, but the remaining $100,000 would. If you’re single, you can only exclude $250,000 out of the $600,000, which leaves you with $350,000 of profit that is subject to capital gains tax. 

It’s worth noting that those exclusion guidelines apply to primary residences and longer ownership periods. You may have to pay taxes on the full “capital gain” if one or more of the following factors apply to your situation:

  • If the home isn’t your principal residence, or it was only your primary residence for less than two years (some exceptions apply, such as for members of the military).
  • You owned the home for less than two years in the five-year period that occurred before you sold it.
  • You previously claimed the capital gains exclusion on a different home in the two-year period before this most recent sale.
  • You are subject to expatriate tax.
  • You purchased your home through a like-kind exchange in the past five years.

How much do you have to pay in capital gains taxes? 

If you do need to pay capital gains taxes on some or all of the money you made off a home sale, you then have to identify what your tax rate is. 

  • Short-term capital gains tax rate: If you owned the home for less than a year, your capital gains tax rate will be your typical income tax rate (a.k.a., your tax bracket).
  • Long-term capital gains tax rate: If you owned the home for more than a year you typically qualify for either a 0%, 15%, or 20% tax rate — the rate depends on what your filing status and income is. 

Are there any tax benefits you can qualify for? 

Alongside the exclusions previously outlined, you may qualify for special circumstances that help give you a capital gains tax break. 

There are some special rules in place that allow sellers to either claim a full or partial exclusion, that apply to:

  • Divorce settlements. If you acquire ownership of the home through a divorce settlement, the amount of time your former spouse owned the home may count towards the two-out-of-five-years rule.
  • Divorce and separation agreements. The spouse who doesn’t live in the home during a divorce or separation agreement can count the time their spouse lived in the home to the test as well. This is especially relevant if one spouse lived in the home while the sales process was underway. 
  • Temporary absences. Even if you didn’t use the home as a primary residence for the full time you owned it, you are able to count short temporary absences towards that time test, even if you rented the home out during those brief absences.
  • Death. If one spouse dies prior to the sale of a home, the surviving spouse may count the time the deceased spouse lived in the property towards the ownership-and-use test.

Does the amount you sell it for impact your taxes? 

Yes, how much you sell your home for can greatly impact your annual taxes. When tax season rolls around after you sell your home, you need to report that sale on your tax return if one of the two events occurred:

  • You received a Form 1099-S
  • You didn’t meet the requirements for excluding the capital gain

Typically, either the real estate closing agent, real estate broker, mortgage company, or title company you worked with when you sold your home will issue Form 1099-S. If you want to avoid getting this form and a copy of it going to the IRS, you have to tell the appropriate party that at any time before February 15 (the year after the sale) that all of the profit from your home sale is tax-free. To do this, you must assure the responsible party that:

  • You both owned and utilized the residence as your primary residence for at least two years during the five-year period that leads up the sale (or your spouse did).
  • Neither you nor your spouse sold or exchanged another principal residence during that two-year period.
  • You didn’t use any portion of the home for business or rental purposes.
  • A minimum of one of the following statements apply to your situation:
  • You’re single and the sale price is $250,000 or less or the capital gain on the sale is $250,000 or less.
  • You’re married and the sale price is $500,000 or less or the capital gain on the sale is $500,000 or less.
  • You plan to file a joint tax return for the year of the sale.

You should only receive a 1099-S form if you need to report your home sale on your income tax return, but if a mistake occurs and you receive a Form 1099-S anyways (the IRS will get a copy too), that doesn’t mean you necessarily have to pay taxes on the home sale. Mistakes happen, so make sure you have all of your paperwork from the sale ready to show to the IRS to prove you don’t owe capital gains taxes. 

Who can help me figure this all out?

The math necessary to determine if you owe capital gains tax is often a bit trickier than just calculating the difference between what you bought and sold the home for. So don’t be afraid to ask for help with this. If it’s unclear to you if you owe capital gains taxes or not, it’s always helpful to consult a financial advisor to help you gain clarity and some peace of mind. 

To determine the gain on a home sale, you need to determine what your adjusted basis is in order to figure out how much you gained or lost in the sale. 

The adjusted basis represents how much you’ve invested in your home. This investment includes how much you paid for the home as well as the expenses you took on to make capital improvements. A capital improvement adds value to a home, extends its life, or adapts the home for a different use. 

The addition of a new roof, swimming pool, or central air conditioning unit all count as capital improvements, but minor repairs and updates like painting the walls don’t. 

Once you add capital gains expenses to the original cost of the home, you increase your adjusted basis, which then decreases the amount you gain on a sale. 

If you’re not quite ready to meet with a financial advisor, there are also online tools that exist to help you calculate capital gains taxes, like this one from SmartAsset. While tools like this give you an idea of what to expect, it really is more reliable to work with a financial advisor. The last thing you want is to wake up to an unexpected (and quite large) tax bill. 

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