The numbers spinning through your head at this point include principal and interest payments, closing costs, down payment funds and moving costs. Unless you happen to be making this move right around April 15, when federal income taxes are on everyone’s mind, you may not have given much thought to taxes on the sale of your home. In most cases, that’s OK, because for the vast majority of people no taxes are due on a home sale.
Taxes and Home Sellers
Federal tax law allows home sellers a tax exclusion on the capital gains from the sale as long as they meet certain criteria, the most important of which is that the home must be the primary residence for at least two of the previous five years. Single taxpayers can exclude a profit of up to $250,000, and married taxpayers who file joint returns can exclude a profit of up to $500,000. You can use this exclusion more than once in your lifetime as long as you haven’t taken the exclusion within the past two years for another house.
The Internal Revenue Service spells out certain circumstances in which you can take the exclusion on your profit, even if you don’t meet the two-year requirement. If you couldn’t live in the house because you’re divorced or your spouse died, or if you were deployed overseas by the military or by the U.S. Foreign Service, you may still be able to qualify for the full exclusion.
A partial exclusion may be possible if you sold your house before two years of residency due to a job loss or transfer, illness or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.
Consult with a tax professional to determine your eligibility for the exclusion.
Calculating Your Tax Bill
If you’re certain that you’re not required to pay taxes on the sale of your home because you meet the exclusion eligibility requirements, then you aren’t required to report the sale of your home on your federal tax return.
If you do have to pay taxes, you and your tax professional will need to calculate the adjusted basis of the house. The adjusted basis is the original price of your home, plus capital improvements, minus any depreciation. Capital improvements mean things like adding a deck or finishing a basement or remodeling your kitchen, not routine maintenance. Depreciation refers to tax credits you took such as for a home office, a first-time home buyer tax credit, or a credit for energy-efficient improvements.
Your taxes will be based on the calculation of the sales price of the home, minus deductible closing costs, minus your basis. Some examples of deductible closing costs include the real estate broker’s commission, title insurance, legal fees, administrative costs and any inspection fees paid by you instead of the buyer. If you made any home improvements specifically in order to sell your home, such as new landscaping or repairs or replacing the carpet in some rooms, you can deduct those costs — as long as you did them within 90 days before the sale.
You may also be able to deduct moving costs from your tax bill if you’re moving at least 50 miles because of a job change.
While these are potential tax implications of selling your home, you should always consult a tax professional to make sure you are meeting current IRS requirements.