What Taxes Must You Pay When Selling a Home?
The idea of earning a fair amount of profit from a successful home sale may sound exciting. However, when you consider the taxes you must pay for selling your home, the idea can quickly move to “daunting.” The good thing is, the chances that you’ll have to pay taxes aren’t incredibly high depending on your situation.
If you live in an area where the value of your home appreciated for quite some time, you will probably sell it for a net profit. Depending on how much you earn from the sale, a significant chunk might go to the IRS. Understanding the net proceeds and the cost of selling your home is the only way you’ll know whether or not you have a tax liability.
In many cases, you may not have to pay the IRS a cent. If you’re selling your primary residence and you meet all of the right requirements, you might qualify for a capital gains exclusion. If that sounds like you, you may not need to report your home sale to the IRS.
Avoiding Taxes When Selling Your Home
Most of the time, the IRS allows people to exclude up to $250,000 in real estate capital gains if those gains come from your primary place of residence where you file your income taxes. In the case that you file jointly or are married, that number rises to $500,000. You will need to meet these conditions to qualify:
- You did not acquire the home through a like-kind exchange
- You do not pay expatriate tax
- You or your spouse owned your home for at least 24 months out of the past five years prior to selling
- You and your spouse lived in your home for at least 24 months out of the past five years prior to selling
- In the past two years, you have not claimed capital gains exclusion on the sale of another home.
If your profit is greater than the maximum exclusion amount above, you’ll need to make the necessary adjustments when finding your capital gains. Make sure to increase your basis with capital improvements you made to your property while owning it, as well as closing costs.
Let’s say you bought a home for $300,000 and you’re preparing to sell it for $600,000. Closing costs were $5,000, the new Backhouse was $20,000, the HVAC system installation was $15,000, and the flooring was $10,000. Because your net gain went down to $250,000, you won’t need to pay taxes on your profits.
When Do I Need To Pay Taxes On The Sale Of My Home?
You will not qualify for the capital gains exclusion if any of the following are true for your situation:
- You have not owned the home for two years
- You did not live in the home for two years (exceptions for those with disabilities or military service members)
- The home was a rental property or vacation home
- You already claimed capital gains exclusions in the past two years.
- The home was acquired through a like-kind exchange.
- You pay expatriate tax.
Here at National Cash Offer, our goal is to make the home selling process as easy as possible, purchasing homes “as-is” and closing in as little as two weeks. However, we are not tax advisors. The tax code is riddled with exceptions and requirements, all of which are very nuanced. We recommend speaking with a tax preparer to get advice if you are unsure about your tax liability.