Capital Gains Tax

Sellers frequently overlook the fact that they may be liable for capital gains tax when they sell their home, and while there’s a good chance that the profit from your sale will not be taxable, you really need to know whether it is or not before you put your home on the market.

Unmarried home owners can exclude up to $250,000 in profits from the sale (the Capital Gain), when they sell their primary residence and married couples can exclude $500,000. This is the IRS Section 121 Exclusion. The Capital Gain is the difference between the sold price and your Basis in the home.

Your Basis is the total of what you paid for the home PLUS the costs you incurred in the purchase, such as title fees, escrow fees etc., and real estate agent commissions, PLUS the costs of any major improvements you made, such as replacing the roof or the furnace.

If your Capital Gain is positive, you will have to pay tax on that amount unless you qualify for the Section 121 Exclusion. To qualify for that break, you must have lived in the home for a minimum of two of the five years immediately preceding the date of sale. The two years don’t have to be consecutive, and you don’t have to live there on the date of the sale.

So in summary, your taxable capital gain is the actual capital gain less the exclusion. Any profit from the sale of your home is reported on your Schedule D of your annual tax return.

All of this is just a summary of how it works and there may be other costs and circumstances that the IRS will allow you to take into consideration when calculating any capital gains tax liability. Be sure to consult a tax professional before filing.

Also talk to your tax adviser before trying to calculate how much you will have to pay in taxes. I hear all kinds of percentages bandied around and they are mostly incorrect. It’s a complex calculation, which is why you need the help of a professional.