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When you sell your primary home, the IRS allows you to exclude a significant portion of the profit from your taxes. This exclusion — $250,000 for single filers and $500,000 for married, joint filers — is so large that most sellers pay no federal capital gains tax on the sale of a home. But if you net $620,000 from the sale of your home because you took deductions for retirement, you’ll probably owe capital gains taxes on some of that profit.
A financial advisor can help you make financial decisions, such as optimizing the sale of real estate within the context of your financial plan. Find a trusted financial advisor today.
When you sell an asset, including real estate, you may pay capital gains tax on the gain from the sale. Capital gains can be calculated simply by subtracting the cost basis of the asset from the sales price.
In the case of real estate, you must calculate the property’s adjusted cost basis—the amount you paid for the home, plus any additional investments or improvements you made to it. This includes any upgrades, extensions or additions you have made to the property. It does not include repairs and maintenance, interest payments or temporary changes.
Essentially, if you spent money to improve the property’s value, extend its utility or extend its life, you can add it to the property’s cost basis. If you have spent money to maintain the condition of the property, you cannot.
For example, say you spent $500,000 on a house. Then, you spend $50,000 on kitchen renovations and $10,000 on a new roof. You later sell the house for $700,000. Your taxable capital gain would be: $700,000 – ($500,000 + $50,000 + $10,000) = $140,000.
If you need help calculating your capital gains or tax planning, talk to a financial advisor.
A retired couple agreed to sell their home for a profit of $620,00.
When you sell a primary residence, the IRS allows you to exclude a significant portion of the gain from your capital gains taxes and only pay taxes on the remaining net gain. This exclusion limits $250,000 for single filers and $500,000 for married couples filing jointly.
For example, say you are a single filer and you sell your home and make a $300,000 profit. After the deduction, you will only pay tax on $50,000 ($300,000 of capital gains – $250,000 of exemptions). Again, remember that it’s not the amount you pay, just the remaining amount you owe in taxes.
This is known as the Section 121 exception. While you can find the full details in Publication 523, to qualify for this exclusion you generally must sell your primary home (so, not like a vacation home or investment property). You must have owned and used the home as your primary residence for at least 24 of the past 60 months, although this time does not have to be continuous. And in most cases, you won’t qualify for a Section 121 exemption if you’ve taken one in the past two years.
If you sell real estate that doesn’t meet these requirements, you may pay capital gains tax on the entire gain. However, given how large these exemptions are, most families pay little, if any, tax when they sell their primary residence. A financial advisor with tax expertise can potentially help you determine whether you are taking advantage of the appropriate deductions and exemptions when selling your home.
A couple calculates how much they will owe in capital gains taxes when they sell their home for a profit of $620,000.
If you sell your home and pocket $620,000 in capital gains, you’ll likely owe taxes on a portion of that gain. How much will depend on a couple of important questions:
First, make sure you have added up all applicable investments or principal cost basis (how much you paid for the home). As we discussed above, this includes any upgrades, additions, and improvements you’ve made over the years.
You can also factor in the cost of selling the property. These costs can be applied to the selling price, making it lower on paper. For example, you can deduct appraisal fees, attorney fees, advertising costs, closing fees, broker commissions and other expenses “directly related to selling your home” from the sales price.
If you have calculated your benefit correctly, your taxable benefit will depend on your Section 121 eligibility and your marital status. You will pay tax on:
$620,000 if there are no exceptions
$370,000 if you are a single filer and qualify for the $250,000 exclusion
$120,000 if you’re married and filing jointly and qualify for the $500,000 exclusion
Your election to deduct will not change this tax status. Years ago, Congress allowed home sales to be tax-free on what it called a like-for-like exchange. Under this law you can sell a house and use the money to buy a new one, only paying taxes on the rest. While you can still use the same type of conversion on investment properties, you can no longer do it with a first home sale.
The amount you will pay in taxes depends on your capital gains tax rate. This sale will put you in the minimum 15% tax bracket. If you have significant gains from other assets, they may push you into the 20% tax bracket. If you have a high enough gross income, you may also be subject to a 3.8% net investment income tax.
Finally, if you own the home for less than a year, the gain will be taxed as a short-term capital gain and subject to ordinary income tax rates. But if you need extra help managing your tax liability from selling a home, consider meeting with a financial advisor before selling your home.
The IRS allows you to deduct either $250,000 or $500,000 of capital gains realized when you sell your primary residence. If the net profit exceeds the exemption, you will pay capital gains tax on the remaining profit. A single person who nets $620,000 from the sale of their home can pay capital gains tax on up to $370,000 of the gain, while a married couple filing their taxes jointly can only pay tax on the gain of $120,000.
A financial advisor can help you determine how buying and selling real estate can affect your long-term financial plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
If you need help calculating your capital gains tax liability on the sale of stocks and other securities, SmartAsset’s capital gains tax calculator can simplify the process for you, whether your gains are long-term or short-term gains.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t subject to significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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The post I’m selling my house to downsize for retirement, and I’ll net $620k. Do I have to pay capital gains tax? First appeared on SmartReads by SmartAsset.
