Whether it’s your primary residence or second home, selling a house can lead to major tax liabilities. The sale of your home may be taxable, depending on whether you realize a capital gain (profit) from the sale and whether you meet certain conditions for excluding that gain from your taxable income.
Is the sale of my home taxable?
Whether you’ll owe taxes on the sale of your home depends on various factors, including the amount of profit, your ownership and use of the home, and any deductions or exclusions you qualify for.
Capital gains tax is a tax on the profit you make when selling an asset, including your home. If you sell your home for more than your adjusted basis (original purchase price plus improvements, minus depreciation or casualty losses), you have a capital gain.
What is the capital gains exclusion for home sales?
The IRS allows you to exclude a certain amount of capital gains from the sale of your primary residence.
- For single filers, you can exclude up to $250,000 of capital gains.
- For married couples filing jointly, you can exclude up to $500,000.
Requirements for the Exclusion:
- Ownership and Use: You must have owned and lived in the home as your primary residence for at least two out of the five years preceding the sale.
- Frequency: You can only claim this exclusion once every two years.
Reporting the Sale:
- If your profit exceeds the exclusion limit or you don’t meet the requirements, you’ll need to report the sale on your tax return.
- You’ll use Schedule D (Form 1040), Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets, to report the sale and calculate any taxable gain. If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable. Additionally, you must report the sale of the home if you can’t exclude all your capital gain from income.
How to Reduce or Avoid Capital Gains Tax:
- Home Sale Exclusion: Utilize the exclusion if you meet the requirements.
- Increase Your Basis: Keep records of home improvements, which can be added to your basis and reduce the taxable.
- Deduct Selling Expenses: Costs associated with selling, such as real estate commissions, can be deducted from the sale price to lower the taxable gain.
What are other factors that may impact my taxes when selling a house?
There are many other tax considerations when selling your home. For example, if you’re selling your home at a loss, you’re not able to deduct that loss.
Here are a few more common ways your tax situation might change:
Installment Sales
If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available.
Homestead Exemption
While the capital gains tax exclusion affects federal taxes, the homestead exemption option affects local taxes. Some states and local governments offer a homestead exemption, which reduces the value of your primary residence for local property taxes. Read more about the homestead exemption.
Rental and Vacation Properties
The IRS only allows homeowners to exclude the gain on their primary residence, not on a second home. If you’ve rented out your home and are now selling it, this may affect your taxes in a variety of ways. Learn about when second homes are considered rentals.
If this is a tax strategy you’d like to try using, we highly recommend the help of an experienced local accountant. Schedule a discovery call today if you’re interested in connecting with the team!
