You may be in the position where you are looking to sell your home. You may be looking to get into something bigger, or down-size. Maybe you just want to sell your house to take advantage of the market, and use your home equity. Either way, you are probably wondering about taxes from selling your home.
Depending on your financial situation, and other factors, you may or may not have to pay taxes when you sell your home. Here, we will discuss what you need to know in order to understand if you will have to pay taxes from selling your home. Although we use the term home, this article can apply to any type of real estate such as a condo, townhouse, etc.
Did you make money on the sale of your home?
The first step in determining if you owe taxes from selling your home is to calculate if you have a gain or loss on the transaction. A gain basically means that you came out of the sale with more money than you started with. A loss is the opposite. If you sell your home at a loss you do not have to worry about paying taxes.
So, to calculate if you have a gain or loss, follow these simple steps.
- Find out the original purchase price of your home. You may need to contact your bank or mortgage lender.
- Add the cost of any major renovations or improvements you made to your home. Regular repairs and maintenance items do not count in this case. Major improvements can include a new septic system, addition, kitchen renovation, etc.)
- You will also have to add in the cost of any selling expenses. Expenses incurred during the selling process include closing costs and possible brokerage fees.
- Once you have the sum from the previous three steps, subtract this figure from what you sold your house for.
If the sales price of your home exceeds the sum from the first three steps, you have a capital gain. However, if the original purchase price, plus improvements and selling expenses is more than what you sold your home for, you have a capital loss. So, do you have a capital gain? If so, the next thing to do is determine if you have to pay taxes on it.
Capital Gains Tax Exclusion
If you have a capital gain on the sale of your house, good job! This is definitely a better position to be in compared to a capital loss. Now, you will have to determine if you have to pay capital gains taxes from selling your home. Odds are, you will be able to exclude most of the gain from taxes.
If you file your tax return as a single filer, you can exclude $250,000 in capital gains. This means if your capital gains from the transaction is under this amount, you should be worry free. If your capital gains are more than $250,000, it is likely you will have to pay capital gains tax on the difference. If you file your taxes as married and filing jointly, you can exclude up to $500,000 in capital gains.
There are also some other exclusions and nuances to the exclusions you should consider.
- If you acquired your home through a 1031 exchange in the last 5 years, you do not quality for the capital gains exclusion.
- Also, if you are a non-tax resident you don’t qualify for the exclusion.
- In order to qualify for the exclusion, you have had to of owned the home for 24 months out of the last 5 years.
- Another way to qualify for the exclusion is if the home was your primary residence for 24 months out of the last 5 years. Note that it does not have to be 24 consecutive months – you just have had to used this home as your primary residence for 720 days during the last 5 years.
- If you excluded home related capital gains on any of your last 2 tax returns, you do not qualify.
These are just some of the specifics related to qualifying for the exclusion. If you have any questions, a real estate agent or accountant should be able to help.
Partial Exclusion
If you do not qualify for a full capital gains tax exclusion, you may qualify for a partial exclusion. This is where you can exclude a portion of the capital gains so you won’t pay as much taxes from selling your home. There are cases when you would not qualify for a full exclusion. For instance, if you fail to meet the residence test, but had to move for some specific reason, you may qualify for a partial exclusion.
Here are some ways to qualify for the partial exclusion:
- If you or your spouse gets a work transfer, or finds a new job 50 miles from your primary residence.
- In the case when you move to take care of yourself, family member, or loved one, you may qualify for a partial exclusion.
- Some other qualifications include unemployment, death of a household resident, divorce, or birth.
Additional Considerations
If you didn’t think this process was complicated enough, well then here are some other factors to consider.
If part of your home was used as a rental property, that portion of the home is not eligible for an exclusion. This makes things difficult because you will have to calculate a separate gain or loss on that portion of the home. Also, if you claim the home office deduction then you will not be able to exclude a gain from that portion either.
However, there is some good news. If you meet all the qualifications stated, you can exclude capital gains and taxes from selling your home more than once in your lifetime.
Taxes From Selling Your Home – Summary
If you are selling your home, there is a lot to consider. Plus, there are many financial factors to consider when buying a house as well. We couldn’t cover everything in this article. That being said, it should have given you a good understanding of how to qualify for a capital gains exclusion.
Before you decide to sell your home, have a chat with a CPA or accountant. They will be able to answer any questions you have. This is very important considering everyone’s tax and financial situation is different. Make sure you get the correct tax advice before you make such a huge decision like selling your home.
