In most cases, when selling your primary residence you can exclude $500,000 of the gain if you file as a married couple. If that’s your situation, and you meet conditions to have the gain qualify as a long-term capital gain, you likely won’t owe any tax. If you file singly while still meeting long-term capital gain conditions, you can only exclude $250,000. In that case you’d likely owe taxes on $230,000 of the gain.
However, your actual tax bill can vary widely depending on your situation and the tax-management strategies you employ. You may have to pay taxes on some, all or none of your net, depending on circumstances. If you’re evaluating tax consequences of selling your home, consider talking it over with a financial advisor.
Capital Gains Tax Basics
As a rule, any time you sell an investment for more than you paid, you owe taxes on the gain. This applies to your principal residence as well as stocks, bonds and other assets. If you owned the asset for more than a year, you’ll owe long-term capital gains taxes of 0%, 15% or 20% depending on your income. If you sold the asset after owning it for less than year, the gain is added to your ordinary income which is taxed according to the current income tax brackets.
When it comes making a profit by selling your primary residence, special rules apply. The main ones are the $250,000 exclusion for single filers and the $500,000 exclusion for married joint filers. The exclusion means you can deduct this amount from the net gain on the sale. You’re only taxed on what is left afterward and, if there’s nothing left, you’ll owe no tax.
Speak with a financial advisor to navigate the nuances of taxes in your own situation.
Capital Gains Tax in Action
Much depends on individual circumstances when it comes to taxes on sale of a residence. Here’s what could happen in four different simplified scenarios:
Scenario One: You are married filing jointly, owned and lived in the home for two of previous five years and haven’t used the exclusion in the last two years. In this case, all of the $480,00 gain would be covered by your $500,000 exclusion. You’d owe no taxes on the sale.
Scenario Two: You are single filing jointly, owned and lived in home for two of the previous five years and haven’t used the exclusion in previous two years. You can exclude $250,000 of the net, but you’ll owe long-term capital gains at the rate of 15% on $230,000 of the gain. The tax bill would be $34,500.
Scenario Three: You have owned the home for at least a year but you haven’t lived there for two of the previous five years or you have used the exclusion in the previous two years. You can’t exclude any of the gain and you’ll likely owe capital gains tax of 20% of the $480,000, or $96,000.
Scenario Four: You haven’t owned the home for at least a year. In this case, the entire $480,000 gain will be added to your ordinary income and be taxed according to the current income tax rates. Your rate will depend on your other income and your filing status. However, the added income is likely to push you into the 35% bracket at least.
A financial advisor can help you integrate your retirement and tax objectives. Get matched to a fiduciary advisor for free.
Other Strategies
If you find yourself owing taxes on sale of your primary home, there are some moves you can make to reduce the bill. The first is to make sure you have accurately calculated the adjusted cost basis when figuring your net. To do this, add the home’s initial purchase price to agent commissions and legal fees paid in connection with the transaction. Also add money you’ve spent for remodeling, additions or improvements. Now subtract this total from the sale price. This is your taxable net gain.
For instance, say as a single filer you bought the home for $300,000 15 years ago. You sold it recently for $780,000 and you’re using that to calculate your $480,000 net gain. As the seller you paid a 6% real estate agent commission of $46,800, plus $5,000 in eligible legal fees. You put in a $40,000 pool a few years ago, and replaced the roof for $15,000 a while back. These sums amounting to $106,800 can be added to the $300,000 purchase price to generate an adjusted cost basis of $406,800. Now your instead of owing taxes on $230,000, you’ll owe taxes on just $123,200.
If you’re an investor, you may be able to use offsetting capital losses to lower your taxable gain. For instance, if you lost $50,000 on a stock trade that was realized during the current tax year, you may be able to reduce your capital gain on the home sale by a similar amount. Some conditions apply, such as that you use short-term capital losses to offset short-term capital gains first and the same for long-term capital gains. However, you may be able to cut your tax bill if you have other capital losses.
Rules on taxing gains from sale of your primary home change from time to time. For instance, at one time you could defer gains. However, that option no longer exists since it was replaced by the current system of exclusions. Another gain-deferral strategy, using like-kind exchanges, only applies to investment properties.
You may be able to qualify for partial exclusion of the gain if you meet specific requirements, such as you or your spouse being transferred to a workplace at least 50 miles further away than your previous workplace. Health conditions, divorce and unemployment may also open the door to a partial exclusion.
Consider speaking with a fiduciary financial advisor if you have questions about your personal circumstances.
Bottom Line
You can avoid paying any taxes on the gain if you’re married and have lived in the home for at least two of the previous five years and haven’t used the $500,000 principal residence capital gains exclusion in at least two years. If you’re single, you’ll likely pay taxes on at least some of the gain. However, a number of factors other than marital status, length of time in the home and previous exclusion use also may come into play. Depending on the details, you could owe from zero to many thousands of dollars.
Tips
- You don’t have to grapple with the complexities of managing taxes on your home sale by yourself. A financial advisor can provide insight. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Capital Gains Tax Calculator makes short work of figuring both long- and short-term capital gains taxes.
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