Capital Gains and More: Tax Tips for Home Sellers

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Updated on March 7th, 2024

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tax tips for home sellers

Before you put your home on the market, it’s crucial to consider the tax implications as part of your sales strategy, whether you’re simply upgrading to new digs or planning a significant transition.

It’s always prudent to consult with a tax professional or financial advisor for personalized advice regarding your specific tax situation. Every individual’s circumstances can vary, and a tax professional can provide tailored guidance based on your unique financial and tax considerations.

Here are some tax tips for home sellers:

Make Sure You Don’t Owe Capital Gains Tax

The windfall you receive from real estate price appreciation is considered a capital gain, and may be taxable by the federal government. For example, if you bought a place at $150,000 and sold it for $225,000, your capital gain was $75,000.

But, don’t worry: if you’ve owned your home for at least two years and it’s been your primary residence for at least two of the past five years, you’re likely in the clear. The first $250,000 in capital gains is tax-exempt (and that goes up to the first $500,000 if you’re married and filing jointly). So for the average homeowner, capital gains tax is not a concern.

And, even if you haven’t lived in your home two years before selling, there are qualifying unforeseen circumstances (such as a divorce or job transfer) for which you may be able to waive the capital gains tax up to the above amounts.

That said, there are instances when this tax will be in play: If you made an extraordinarily good investment in your home choice, you’re selling a vacation home or you’re selling after owning for less than two years without a qualifying circumstance.

Have questions about the housing market? We're here to help.

If You Owe Capital Gains Tax, Calculate Your Cost Basis

If you’re among those subject to capital gains tax on a residential transaction, accurately calculating your cost basis is crucial to minimizing your reportable capital gain. Your home’s true cost extends beyond the initial purchase price, encompassing additional expenses incurred throughout ownership. These costs must be factored in to determine the actual profit earned.

Here’s one example of a significant cost basis increase: Let’s say you bought a $200,000 home on a large lot, with the intention of expanding it. After spending $180,000, you have a much larger, nicer home that appraises for far more than $200,000. When you go to sell, you need to remember that it cost you $380,000 to get to the home you ended up selling. (Be careful, however: you can generally only elevate your cost basis if you made significant changes to the home – not if you paid for basic maintenance and repair.)

Additionally, many of your selling costs (such as broker fees, certain closing costs and some cosmetic changes in preparation to sell) can be added to your cost basis, meaning they can also reduce the amount of your capital gain. To make sure you properly report your cost basis, consult a tax professional.

If You’re Moving for a Job, You Can Often Deduct Your Moving Expenses

While this isn’t specifically home related, many people put their home on the market to take a new job, or because they were transferred by their company. If your company does not pay for your move and the move is over 50 miles, you can deduct your moving expenses from your annual income. While this may seem like a minor perk, it will often save you hundreds of dollars come tax time.

If You Sold for Less Than You Owed in 2014, You Won’t Pay Any Home-Related Tax

It may seem strange but, before 2007, if you sold your home as a short sale and received debt forgiveness from your lender, the amount of the forgiveness was reportable to the IRS as taxable income. In other words, if you sold your home for $200,000 but you still had $240,000 left on your mortgage, the $40,000 difference would be considered income by the IRS, provided it was forgiven by your lender.

After the housing collapse last decade, Congress enacted the Mortgage Debt Forgiveness Act in 2007 to provide temporary relief to troubled borrowers facing forgiven mortgage debt. This act waived the requirement for borrowers to report forgiven mortgage debt as taxable income, offering crucial assistance to homeowners in distress. Although the act expired in 2013, it has since been extended multiple times. The latest extension, enacted in December 2020, provides relief for debt forgiven from January 1, 2021, through December 31, 2025

Ready to sell? Find out more about selling with Redfin.

 

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About Scott Kelly
Scott Kelly is a Redfin real estate agent on the North Shore in Chicagoland. He grew up as the youngest in a family of home builders and real estate brokers, so he learned the trade early, often during family discussions over dinner. He has worked as a custom home builder and remodeler, and has over 25 years of industry experience. As a Redfin agent, he’s proud to serve his clients with his expert insights, strong communication skills and superior negotiating.

If you are represented by an agent, this is not a solicitation of your business. This article is for informational purposes only, and is not a substitute for professional advice from a medical provider, licensed attorney, financial advisor, or tax professional. Consumers should independently verify any agency or service mentioned will meet their needs. Learn more about our Editorial Guidelines here.
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