I’m often asked by homeowners about potential taxes they may owe when they sell their house. Many individuals wonder if they make a profit, do they owe part of that profit to the Internal Revenue Service in the form of capital gains taxes. The answer, as always when it comes to taxes and law, is it depends.
The tax that potentially results from the profit when a home is sold is called a capital gains tax. The IRS and some states assess capital gains taxes on the difference between what you pay for your home and what you sell it for. For example, if you bought a house for $300,000 and sold it for $500,000, that leaves you with a profit of $200,000. There are a few instances in which you may or may not owe taxes on that $200,000 profit.
The first instance is whether you file your taxes single or married. If you’re single, you do not have to pay capital gains tax on the first $250,000 of profit. Married couples have a $500,000 exemption. That being said, there are exclusions that may apply that may dictate whether you owe capital gains tax. The most common exclusions are as follows:
- You owned the property for less than two years
- The house wasn’t your primary residence
- You didn’t live in the house for at least two years before you sold it.
- You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home
- You bought the house through a like-kind exchange in the past five years
- You are subject to expatriate tax, which is a tax that is levied on an individual that no longer lives in the country
If it turns out you do owe taxes on the profit from the sale of your property, you’ll want to determine the capital gains tax rate that applies to you. Typically, if you owned the property less than one year, you’ll pay the short-term capital gains tax rate, which is the same as the tax bracket you fall into for your regular income tax. If you’ve owned the property for more than one year and you do owe taxes, you’ll likely pay either 15 or 20 percent, depending on your filing status and income.
Selling property and determining whether you owe capital gains tax can be confusing. Don’t hesitate to speak with an experienced tax attorney if you have questions about the process.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.