Nobody wants a surprise when tax season rolls around. If you sold a property in the last tax year, you could have a significant tax burden. Taxes are often one of the standard costs of selling a home.
The tax implications of selling a house depend on a variety of factors, like how long you owned the property, your filing status, and more. Before you sell a home, it’s important to understand what you’ll be on the hook for to— and what exemptions can help you lessen your tax bill
Home sellers have to pay a capital gains tax on the profits of their home sale unless they qualify for an exemption. The size of their tax burden will depend on a variety of factors, like:
The capital gains tax is a fee on the profit an investor makes when they sell an investment. It’s a common tax on the sale of stocks, digital assets (like cryptocurrencies and NFTs), and real estate.
To determine the gain on a home sale, you need to determine what your adjusted basis is. This number will determine how much you gained or lost in the sale and how much is taxable.
Your adjusted basis is how much you paid for your house plus all of the expenses you took on to make capital improvements, or anything you did that added value to your home, extended its life, or adapted the home for a different use.
For example, 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.
Fortunately, the IRS allows exclusions on capital gains, so you won’t pay taxes on your adjusted basis. What is considered a taxable profit will depend on your filing status:
But you may have to pay taxes on the full “capital gain” if one or more of the following factors apply to your situation:
If you do need to pay capital gains taxes on some or all of the money you made off a home sale, your tax rate will depend on the time you’ve spent in the home:
All of those numbers can get confusing, so let’s look at an example:
Let’s say you bought a house 20 years ago for$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.
Curious what the tax implications are of selling your home? Use our Home Sale Proceeds Calculator to help find out:
Alongside the exclusions previously outlined, you may qualify for special circumstances that 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:
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:
Typically, either your real estate 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 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.
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.
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. While these tools 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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