You might have to pay taxes when selling your home. But there are ownership and use requirements that can help you avoid paying taxes on some of the gains you’ve accrued during the time of your ownership. So before you finalize your home-selling plans talk to your tax professional. Don’t skip this step. It’s not a debt you want to be surprised about at some time in the future.
Even if you’re not selling – not even thinking of selling – this information is a keeper!
Income from the sale of your home
There are tax benefits to homeownership and possibly taxes due when selling a home. The federal government wants to take a piece of your home-sale pie.
It’s the gain you receive from your property that is taxed. That equity could be considered income. You may get a break on how much you have to pay. Or you may not pay taxable income at all if the home is considered to be your primary residence. To know what the specific numbers will work out to, be sure to talk to your tax professional. Having a basic understanding will help though.
The definition of primary residence
The definition of primary residence is what may save you from paying federal taxes.
“If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.”
Individuals get a break if:
- Your gain from the sale was less than $250,000
- You have not used the exclusion in the last 2 years
- You owned and occupied the home for at least 2 years
Anything above that $250,000 gain will be taxable as income.
To take advantage of the $500,000 exclusion, married or registered domestic partners must meet the following requirements:
- Your gain from the sale was less than $500,000
- You filed a joint return for the year of sale or exchange
- Either spouse/RDP meets the 2-out-of-5-year ownership requirement
- Both spouses/RDPs meet the 2-out-of-5-year use requirement
- Neither you nor your spouse/RDP excluded any gain from the sale of another home in the last 2 years
Anything above that $500,000 gain will be taxable as income.
You can only have one main or primary residence at a time.
What is the “gain”?
Your taxable gain is usually the difference between what you paid for your home and the sale amount. The IRS has a form – of course – to help you figure out whether or not you have a gain or a loss in the sale. Publication 523 explains the tax rules. The IRS Eligibility test will help you determine what, if any, tax exclusion you qualify for.
Although the government knows how important homeownership is to both people and the economy, they do threaten to remove the capital gains exemption as a way to raise more money. But they haven’t done it yet. So take advantage of it while you can.
This Internal Revenue Service publication references the transfer of ownership. If you’ve had to transfer full ownership or partial ownership to your property because of a divorce that’s one thing. If you’re thinking about doing it to avoid paying taxes don’t do it. Don’t transfer ownership of your property for any reason without consulting an attorney.
Well-meaning parents might think it’s a good idea to transfer ownership to their children as a way to save money or protect themselves. In actuality, it creates a huge tax burden. The longer you’ve owned the home and the more equity you’ve accrued over the years, the bigger the problem.
Exclusions to the gain
I don’t have to tell you that taxes are complicated. And there are exclusions to the rules. Job transfers of over 50 miles during your ownership might be one you can take advantage of.
Health-related moves can enable you to take advantage of certain exclusions too. Things like moving to take care of a family member or relocating to obtain specific healthcare for yourself. Even a doctor recommending you move to avoid a particular health-related problem can help you avoid taxes.
More ways to avoid taxes
A lot of costs associated with purchasing a home and even home maintenance can be a help to avoid taxes when selling your home.
The year in which you purchase your home could be of great benefit too, especially if it’s a full year of ownership. Keep your settlement statement that you got from the escrow company handy. Give it to your CPA to make sure you get those deductions. Recording fees, title insurance, and transfer fees are a few of those possible tax deductions.
All that sweat equity can come back to you. It can not only increase the value of your property but also giving you another tax deduction.
Specific upgrades like a room, deck or garage addition can increase your cost basis. Fixing things in or on your home doesn’t count but if you replace windows as a part of a major remodel that causes all of the windows to be replaced that counts.
What is cost basis?
The costs basis for real property is the amount you paid for the property at the time of purchase plus the types of improvements as explained in the IRS Publication 523. The list of improvements can change at any time. So when you’re collecting all of your receipts for materials, don’t toss any of them. If the list changes to include something new you’ll want to have those receipts organized.
An exchange can only take place during the sale of your investment or rental property. You can take the proceeds from that sale and immediately use those funds to purchase another property. You’re deferring your tax liability. If you do an exchange again, you’ll continue to push those taxes due out further.
When are the taxes when selling your home due?
Any capital gains tax you owe is due at the time of the next income tax deadline.
Your property taxes will be prorated by the escrow company. So you’ll only pay property taxes for the time that you actually owned the home. Then the buyer will take over that cost. Property taxes vary by county.
Property taxes are municipal taxes levied by cities, counties or special tax districts. The property tax assessor will determine the amount to be paid. It’s typically based on the price you paid for the home. There are periodic increases as determined by the assessor’s office.
Real Estate Transfer Tax
Another tax that might be a part of your home sale is the transfer tax. The transfer tax might also be called a deed stamp tax, real estate conveyance tax, or documentary stamp tax. The government entity, whether it’s city, county or state charges the parties to complete the documents required to transfer ownership from the home seller to the buyer. It’s an amount calculated on the sale price of the property and can range from 0.01% to over 4%.
Who pays the transfer tax?
Who pays the transfer taxes when selling your home is determined by the standard in the area where the property is located. In some counties, it might be typical for the seller to pay while in other locations, the buyer usually pays. If the cost is significant, the parties may split the cost between them.
Proposition 19 – The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act
California had Propositions 60 and 90. It enabled homeowners, under certain conditions, to transfer their low property taxes to their next home. Prop 60/90 were limited to the participating counties which became fewer and fewer over the years. Those restrictions became prohibitive and the propositions were inevitably useless.
As a way to increase inventory, the creators of Prop 19 went into action to make the opportunity, once again, more available.
The first configuration of Proposition 19 failed when it went to the voters. I knew it was dead the first time I saw a group of firemen in a commercial. They were saying it was bad for them and teachers. We love and trust our firemen. That proposition didn’t have a chance.
The authors got smart the second time around by including firemen and those affected by wildfire, an especially important issue in California. The new law allows the low tax base to be transferred anywhere in California for older homeowners, homeowners with severe disabilities, and victims of wildfire or natural disasters.
This information is not meant to be tax advice. Be sure to consult with your professional tax advisor for your personal taxes when selling a home.
Vicki Moore, Pacifica Realtor
You can contact me via phone/text at 650-888-9268 or via email.
I specialize in my hometown of Pacifica. However, I have been helping people move in and out of the San Mateo County | Silicon Valley real estate market since 1998.
Are you thinking of selling your home? I have a passion for real estate and would love to talk to you about how I might be able to help you.
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(all data current as of 9/29/2022)
Listing information deemed reliable but not guaranteed. Read full disclaimer.