How Does Selling My Home Impact My Taxes?
When you sell your home, the amount of money left after paying qualifying expenses and any remaining mortgage debt is potentially taxable as capital gains. The good news is that not all profit is subject to capital gains tax. In general, the first $250,000 of profit can be excluded if you are single or married filing separately, and $500,000 if you’re married filing jointly.
In order to qualify for this exclusion, certain conditions have to be met. The home has to be your principal residence (not an investment property) and you have had to live in it for two of the five years leading up to the sale, or 183 days of the year for the two years prior to the sale of the property.
If you’re in a position where your profit exceeds the exclusion amount, you will have to pay tax on the overage. Also, any property taxes you’ve paid on your home can still be deducted, as long as it doesn’t exceed the $10,000 maximum amount for state and local taxes.
What expenses are tax-deductible when selling my home?
It’s important to note that expenses related to your home aren’t treated like the typical deductions on your income taxes. Instead, the benefit is a reduction in your capital gains tax. Anything you’re claiming as an expense gets subtracted from the sales price of your home.
In order for expenses to qualify, they have to tie directly to the sale of the home and aren’t something that affects the physical property itself. Things like advertising, appraisal fees, attorney fees, title search fees, and real estate broker’s commission qualify as expenses. Hiring painters or landscapers would not qualify.
However, some home improvements can give you a potential tax benefit. If you made a big improvement in your home (such as a kitchen renovation), you can add the cost to your home’s tax basis. For example, if you had purchased your home for $500,000, then made a $10,000 improvement, your basis would be $510,000. You would then subtract this amount from the sales price to determine the capital gain.
What is a 1031 Exchange?
A 1031 exchange is still a great tool to use when looking to defer taxes on an investment property sale. This allows you to defer taxes when you exchange a like-kind business, income, or investment property. With a 1031 exchange, sellers are required to place the proceeds into an escrow account of a qualified intermediary. You then have 45 days from the sale of your property to identify three like-kind properties for potential investment. You must close the purchase of one of those three properties identified within 180 days following the close of your sold property.
It sounds complicated but we have done a few 1031 exchanges and can help you determine if this is a good option for you.
To learn more about 1031 Exchanges, visit our blog: "7 Rules Regarding 1031 Exchanges"