Hello and thank you for joining us today, shffk24505153!
You asked whether you need to pay taxes on the sale right away.
This in general will depend on how much capital gains on the sale of your home that you actually end up including in your total taxable income.
Selling a home that has increased in value can make you liable to pay capital gains tax since it is considered a capital asset. Nonetheless, due to the Taxpayer Relief Act of 1997, many homeowners are not required to pay the full tax on he gains, as most qualify for the Sale of Home Exclusion provision at least partially.
To qualify for the sale of home exclusion you must of used the home as your primary residence for at least two of the last five years, before the sale. This will allow up to $250,000 for a single taxpayer, and up to $500,000 of profit to be excluded, if you’re married and file a joint return. For married couples filing jointly to obtain the $500,000 exclusion, both spouses must have satisfied the residency requirement, regardless of whether only one spouse is a property owner. For instance, a married couple filing taxes jointly sells their primary home owned by one spouse. Even if one spouse is the property owner, both spouses need to have lived in that house for at least 24 months in the past five years to qualify for the $500,000 exclusion.
Now if your profit from the sale is more than the exclusion, the excess is reported as a capital gain, and then will be taxed at the special capital gains tax rates, of 0%, 15% or 20% depending on your taxable income.
A few other things to keep in mind:
- You cannot take any capital losses on a sale of principal residence.
- However, you can offset any capital gains with capital losses.
That having been said, not everyone can take advantage of the sale of home exclusion, and in some cases the sale of the home may be fully taxable.
For example if:
- The home is not the seller’s principal residence.
- The property was acquired through a 1031 exchange (more on that below) within five years.
- The seller is subject to expatriate taxes.
- The property was not owned and used as the seller’s principal residence for at least two of the last five years prior to the sale (some exceptions apply).
- The seller sold another home within two years from the date of the sale and used the capital gains exclusion for that sale.
If you determine you will have a non-excludable gain you may want to consider making an estimated payment following the sale. Please see the links below to help with determining how much to pay:
For more information
Please feel free to reach backout with any additional questions or concerns you might have!
Have a great rest of your day!
Terri Lynn, EA
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