If you’re selling your home, it’s important to understand all the tax implications that come along with that process. While there are quite a few, the most prominent taxation is the capital gains tax.
Capital gains taxes are charged when you sell something that has increased in value like an investment such as stocks or properties.
Capital Gains Tax and Your Home 
When you sell your home, the money you receive from real estate appreciation is considered a capital gain, and may be taxable by the federal government. For example, if you bought a home for $725,000 and sold it for $850,000 your capital gain was $125,000. The $125,000 could be taxable if you don’t meet specific requirements.
You can exclude $250,000 of your profit from the sale of your home if you are single and $500,000 of the profit if you’re filing taxes jointly as a married couple. However, you do have to meet specific requirements in order to claim this exclusion:
- The home must be your primary residence.
- You must have owned the home for at least two years.
- You must have lived in the home for at least two of the past five years.
(There are exceptions to these rules for individuals with specific circumstances (i.e. death of a spouse, divorce, job transfer, active military, etc.) For more information, consult a tax advisor or IRS Publication 523.)
If You Owe Capital Gains Tax, Calculate Your Cost Basis 
In the instance that you do end up owing capital gains tax on real estate, you can reduce the amount of reportable capital gain by properly calculating your cost basis. The money you spent on any home improvements, such as replacing the roof, finishing a basement, or adding in a pool can be added to the initial price of your home (but be careful, you can only increase your cost basis if you made significant changes to the home – not if you paid for basic maintenance and repair.)
Here’s an example of a significant cost basis increase: Let’s say you bought a $500,000 home on a large lot with the intention of adding on. After spending $200,000, you have a much larger, nicer home that appraises for $800,000 When you go to sell, you need to remember that it cost you $700,000 to get to the home you ended up selling today. That $200,000 would be subtracted from the sales price of your home. So instead of owing capital gains taxes on the $800,000 profit from the sale, you would owe taxes on $600,000.
Finally, the amount you will pay in capital gains tax depends on your tax bracket:
- If you’re in the 10% to 15% tax bracket, your capital gains tax rate is zero.
- If you’re in the 25% to 35% tax bracket, your capital gains tax rate is 15%.
- If you’re in the 39.6% tax bracket, your capital gains tax rate is 20%.
Taxes can be tricky and full of exemptions and loopholes, so it is crucial that you consult with a tax professional for any questions or concerns.
Ready to sell? Find out more about selling with The Cesi Pagano Team
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