As you move on to the next stage of your life, selling your home may be a happy event.
But, before you go any further, you need to learn about the tax implications of selling your house. A little tax preparation may help you save a lot of money in the long run. So you might have been thinking about the following question: “do you have to pay taxes when selling a house?”
Due to a substantial capital gains exclusion, you may not have to pay any federal income tax on the sale of your home, but not everyone qualifies. Keep reading for our full breakdown of the tax tips and tricks you need to know during your home selling process.
Do You Have to Pay Taxes When Selling a House?
Let’s start with the foundational answers you need.
You may have to pay taxes on the money you get from the sale of your home. There are, however, exceptions that may result in you paying very little or no taxes at all.
If you reside in your home for two of the five years before selling it, the first $250,000 of any profit you earn is tax-free.
If you are married and file a combined tax return, the tax-free sum rises to $500,000 per person. It’s essential to remember that this is profit, not income, for the first $250,000 (or $500,000). This implies that the tax is calculated on the net amount (after costs) you get from the sale of your home rather than the entire amount of money you receive.
You won’t owe any taxes on the sale of the property if you sell it for less than $250,000 more than you paid for it, and you’ve lived in it for at least two of the preceding five years.
Capital Gains Higher Than the Thresholds?
There are two thresholds, one is $250,000, and the other is $500,000. You may be liable to capital gains taxes in such a scenario.
Here’s a hypothetical scenario to give you an idea of how much you could pay if you sell a house for more than $500,000 and file jointly as a married couple.
“You would owe taxes on any sum above the $500,000 – which would be $150,000” if you purchased a home for $350,000 ten years ago and sold it for $1 million today (a pretty realistic scenario in California).
That is, rather than having a $150,000 tax bill, you would owe taxes on that $150,000.
However, you can definitely get that $150,000 figure to drop a little. “Certain closing expenses, like title insurance and attorney fees, are deductible by the IRS. The commission you pay your real estate agent is also deductible. You may also deduct any home improvements you make to the property. This number serves as your cost basis.
Have you lately replaced the roof? Have you added a pool to your backyard, renovated your kitchen, or added a room to your home? Those house upgrades, by the way, may cost a lot of money. Hopefully, you preserved the receipts.
After all of these deductions, the net revenues would be subject to taxation.
Assume that your entire allowable deductions amount to $50,000. Depending on your tax status, you may pay up to 20 percent in federal income taxes, plus state taxes. This would be a $20,000 charge on top of state income tax. The (remaining) $100,000 would be subject to capital gains taxes.
You’ll want to understand how that works when you’re selling your home for cash. Check out how to do so here.
Reporting the Sale of My Home on My Income Taxes?
It’s possible that you won’t have to.
You do not have to declare a gain on your house that falls within the exclusion on your tax return. If your gain exceeds the exclusion amount, you must declare it on Schedule D of your 1040.
The Process of Paying Taxes on Your Home Sale
Yes, for the most part, although there may be some complexities to consider. We’ll go through a few of the more important ones.
Is this a home in which you don’t reside? Or maybe you did 10 years ago, leased it out, and now you’re trying to sell it? This makes it a rental property.
You will have to pay taxes on the sale even if your income is less than $250,000 or $500,000. However, if you resided in the home for at least two years during the previous five years and leased it out for the rest of that time, you will not have to pay taxes if the earnings are less than $250,000 or $500,000, respectively.
If your house is a second home or a holiday home, then you’ll have to pay taxes on the home once again.
If it’s your main home, and you sold a property during the previous two years, you can claim the $250,000 or $500,000 exception.
So you sold a home and didn’t have to pay the property taxes? Awesome. But that was 20 months ago. You’ll almost certainly have to pay taxes.
Understanding Tax Exclusions
You may be able to obtain a complete or partial exclusion. This is one of those situations when consulting a tax preparer might be beneficial. In fact, anytime you sell or purchase a house, it’s a good idea to consult with a tax professional to determine how the property will impact your taxes. You may be able to obtain an exception if you sold a property 20 months ago and purchased a new one with your spouse, and now you’re splitting and selling the house to one of them.
If your husband died and you’re now obliged to sell the home, you may be able to obtain an exception.
You may definitely obtain an exclusion if you lost your job and are now collecting unemployment benefits.
However, obtaining a partial or complete exclusion does not have to be for a sad cause. For example, if you and your spouse are expecting twins, triplets, or even more children and have outgrown your home, you may be eligible for an exemption. If that’s the case, along with all of the parenting and baby literature you’re purchasing, you should see a tax preparer.
Selling a Home: The Tax Edition
When you’re in the middle of a home sale process, things are already overwhelming and nerve-wracking. Trying to understand how taxes come into the process can add unneeded stress.
Hopefully, our guide has shed some light on the whole process and clarified the answer to: “do you have to pay taxes when selling a house?”
And, if you’re hungry for more tax tips, you’ll want to check out our real estate and finance sections.