If you sell your home and don’t buy another one, and you make a large profit on the sale, you could owe federal capital gains taxes on your profit.
BY THE NUMBERS
Typically, you can exclude up to $500,000 of the gain from your income if you file a joint tax return; up to $250,000 if you’re single. You must pass the ownership and use test, which states you must have owned and lived in the home for two of the five years preceding the sale.
In some high-priced real estate areas, you can easily exceed these exclusions if you’ve owned a home for a while. If you kept good records, you should be able to deduct selling and purchasing costs, including commissions and fees, from taxable gains, even if the latter occurred years ago.
You can also use capital improvements made to your home, including a deck, a room addition or a garage, to subtract from your gross gain. This, according to the IRS, will result in an adjusted basis, which is typically your cost in acquiring your home plus the cost of capital improvements, less casualty loss amounts and other decreases.
THAT’S NOT ALL
Even if you’re like most people and won’t have to pay federal capital gains tax, there’s a good chance you’ll pay a variety of transfer taxes, which most states levy. These taxes range from negligible to invasive. Some areas have multiple taxes, with states, counties and even towns and cities taking their share. Generally, most will tax a small percentage of the sale price.
While these taxes may surprise you, take solace knowing that they will also increase the adjusted cost basis on the home you just sold. Talk to your tax professional for more information.