Will I owe taxes when I sell my home? This is a very common question and I am happy to say that most people don’t owe taxes upon sale of a personal residence.
So, let’s review the rules.
Individuals are allowed to exempt up to $250,000 of gain and married couples can exempt up to $500,000 of gain on the sale of their principal residence. This is true if three provisions are satisfied:
- OWNERSHIP The individual, if filing single, or at least one of the spouses if filing joint, owned the home for at least 2 years during the 5-year period ending on the date of the sale.
- USE The individual (single filer) or both of the spouses (joint filers) used the home as a principal residence for at least 2 years during the 5-year period ending on the date of sale. (This means that sale of your rental property may or may not be eligible for the exclusion.)
- Neither the individual (single filer) nor either of the spouses (joint filers) excluded gain from the sale of another home during the 2-year period ending on the date of the sale.
A principal residence is defined as the taxpayer(s) main home, where he/she/they live most of the time. A taxpayer can only have one main home at any time.
Gain is calculated as the adjusted selling price minus the adjusted basis of the home. Basis, at minimum, is the purchase price of the home plus capital improvements. The selling price is reduced by costs of sale.
Let’s do a simple analysis. Assume you purchased a home in 1995 for $100,000 and invested $50,000 in it over the years for landscaping, fencing, new kitchen and bathroom. You sell it for $350,000 in 2016. There were $25,000 in selling costs (commissions, fees, etc.). Your gain is the adjusted selling price of $325,000 ($350,000 minus $25,000 = $325,000) minus the adjusted basis of $150,000($100,000 plus $50,000 = $150,000) or $175,000.
The three provisions listed above are all met. Therefore, whether you file as single or married, the $175,000 in gain is non-taxable, total profit.
There are often complications that need to be addressed in determining whether there is any taxable gain. If you,
- used the home as your principal residence for less than 2 years out of the last 4, the amount of gain exemption will be reduced, possibly (but not always) resulting in taxes owed on the sale
- used the home in a business and depreciated part of it (such as a day care) or claimed home office depreciation, then that depreciation has to be recaptured and there will be some taxable gain.
Also, basis adjustments can be very complicated. Sometimes they work in your favor and sometimes they don’t.
We can help you determine the tax implications of your home sale. Call us before you sell to avoid ugly situations at tax time.
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