Tax Consequences of Selling your Home

There are many factors that come into play in determining how much, if anything, you’ll need to pay in taxes when you sell your home.

If the property you sell is a home that you have owned and lived in for at least two of the preceding five years, then this counts as your primary residence.  The Section 121 Exclusion of the federal tax code makes the first $250,000 ($500,000 for joint filers) of profit from the sale of your primary residence exempt from capital gains tax.

If you do not fulfill this condition to count this property as your primary residence, you may still be able to exempt a certain amount of profit from its sale from capital gains tax if any of several other conditions are met.  These include if you sold your house because you had to relocate for work, for health reasons, or due to other “unforeseen circumstances.”

One way to reduce or eliminate the profit you realize from the sale of your home is to purchase a new home or other property in the same year.

Also, you’ll want to make sure that you add in to the base price of what you originally paid for your home closing costs and permanent improvements you made to the property.

For example, if you bought your home for $700,000, paid $80,000 in closing costs and various permanent home improvements you made over the course of the time you owned the property, and then sold it this year for $800,000, you made $20,000 in profit, not $100,000.

You are allowed to give someone $13,000 in gifts each year, and up to $1,000,000 above that lifetime, without having to pay any gift taxes.  If you were planning to, say, give your son a large gift, you could time it so that you’re giving him the profit you realize from the sale of your home that would otherwise be taxed.  Or you might consider a gift to a charitable organization.

There are also ways you can put your real estate holdings in a non-taxable trust, which will then be conveyed to your heirs when you die, and avoid paying taxes on the profits of any such property that is sold.

Potentially you could have a large tax liability when you sell your home.  But there are clearly many factors to look into that can lessen if not eliminate any such tax liability.