Homeowner

Everything You Need to Know About Capital Gains Taxes and Selling Your Home

There are few things in life as murky as tax law. There’s a lot of misinformation floating around about how you’re taxed on the profit (capital gains in IRS-speak) you make when you sell your home. Plus, this topic made news recently because of proposed changes to the law, causing more confusion (none of the proposals passed, by the way.) Here’s what you need to know about taxes and selling your home.

What is Capital Gains Tax?

Capital gains tax is what you pay on the profit you make from the sale of an investment. Sale price – purchase price = capital gain. It’s as easy as that.

If you’re under the limit of $500,00 in profit for married couples and $250,000 for singles, you’re in the clear. That’s right—no taxes on the profit you make from selling your home.

A Little History

Pre-1997, things weren’t nearly as rosy for sellers who made a profit on their homes. The only way you could avoid paying taxes on your profit was to buy another, more expensive home within two years of selling your old home. You also had to fill out a form to prove that you were exempt.

The Taxpayer Relief Act of 1997 changed all that, making it easier for people to sell their homes without having to buy new ones. Now, you can use the profit you make on anything you want, and you don’t have to report anything to the IRS if you’re under the limit.

The Rules

The truth is that most homeowners won’t owe a penny to the IRS over the sale of their home, but there are a few circumstances that will mean you have to pay. So let’s get down to business and go over some of the rules of the law.

Primary Residence Rule

First, the home in question must be your primary residence. You must live in this principal residence for at least two of the previous five years before you sell it.

This means every sale has to be at least two years apart, but you can sell without paying taxes again and again and again.

Rules for Married Couples

If you’re married, it means you are safe from $500,000 in profit from your home’s sale. However, there are a few rules:

Either spouse can meet the ownership test. If you’ve owned your home for the past two years but just added a spouse to the title after getting married a year ago, you meet the ownership test even though your spouse wasn’t an official owner for the full two years.

Both spouse have to meet the use test; they both must live at the residence for two years. If you shared the home for a year before marriage and a year after marriage, you meet the requirement.

If you don’t pass one of these tests, only your single $250,000 waiver will apply.

Also, if either spouse used the exemption in the past two years, the couple cannot use it until the two years has passed.

Calculating Profit

To arrive at your gain amount, you must establish what’s called your basis in your home.

Your basis in the home is what you paid for the home plus capital improvements you’ve made. These are things that add market value to a home—here’s a helpful list of eligible improvements.

(Important note: if you sold a home before the law change in 1997 and rolled that profit into a home you’re selling now, you must take that amount out of your basis now.)

Next you subtract your basis from what you got from the sale. Take commissions and other selling expenses out of your proceeds from the sale. For example:

Original Sales Price: $300,000

Capital Improvements: $10,000

Basis in Home: $310,000

$500,000 sale price – $30,000 commission – $310,000 basis in home = $160,000 profit

Special Circumstances

If you must sell before two years because of special circumstances, including employment change, health, or other unforeseen circumstances, you may be eligible for a prorated, tax-free gain.

In cases like these, you’ll calculate the amount of time you met the two-year use test. If you’re transferred to another city after being in the home for just a year, you divide 12/24 and get 0.50. Multiply the married exclusion amount by .50, and you’ll be eligible to exclude up to $250,000 in profit.

A law change in 2003 exempted military personnel from the two-year use requirement, letting them sell tax-free whenever they have to move for the military, something that happens all the time.

Please keep in mind that I’m a loan officer and not a tax professional. This blog post is for informational purposes only and does not constitute legal tax advice. For that, talk with your accountant!

Comments are closed.

Words of Praise

Marika has worked with our family on several projects. In each instance, she has demonstrated that she is Professional, Knowledgeable, and Competent. She has the ability to communicate in a clear and concise manner addressing all of our concerns. The very first time that I was able to work with Marika she was assisting our family with a difficult situation. Her guidance and direction were key to bringing about a quick and positive resolution for our family. The most recent instance involved providing research and guidance concerning the selling of our family home, her input allowed us to understand what we should expect for our property and what to expect from the process ahead of the family. I do not and would not hesitate to use Marika Feibel as my Principal Broker.

John Mikkelson

I highly recommend Marika and her team. We had an aggressive time frame in which to sell our home and Marika Feibel absolutely crushed it! From market analysis to open houses and everything in between, Marika was a true professional and always available to communicate via our preferred medium. We will definitely look to her for our future real estate needs.

Steve Inaudi

I highly recommend Marika and her team. We had an aggressive time frame in which to sell our home and Marika and her team absolutely crushed it! From market analysis to open houses and everything in between, Marika was a true professional and always available to communicate via our preferred medium. We will look to her for our future real estate needs.

Desiree Inaudi

Marika came to us as a reference from a close friend who moved to Portland from the LA area late last year. Being in a similar circumstance to him (eg. No strong connections to the area, no idea as to reputability, first-time home buyers), we were grateful for the reference for someone he obviously trusted impeccably. Any and all expectations/preconceptions we had were entirely blown away. Marika was a paragon of professionality. She remained patient, amiable, flexible and always smiling despite the grueling amount of properties and questions we threw at her. She even took the time to scout out potential listings up to 3 months before our big listing visit days to better direct our focus and optimize yield for a limited time frame. When we finally found a property, Marika held our hand each step of the way: from offering to escrow. She was there during the inspection, and there for the assessment. She was always there for us and our future home.

Finding a home can feel like a pitched battle. Everything has weight. Everything is time sensitive, urgent, and profound. It’s easy to stress out to the point of shutting down. Had it not been for Marika’s organizational skills, advice, and guidance, my wife and I honestly don’t know how we would have found our way through this process.

So, with all of that being said, I would recommend Marika without hesitation to any and all potential clients. She really made it a good experience.

Eric Schub

During the summer and early fall of 2017, Marika was my real estate agent for the sale and also purchase of a house in Portland. What impressed me the most about Marika is that she was very responsive and available when needed or a question came up. Marika’s list pricing strategy was wise and resulted in many over asking offers. Marika was on site and arranged many of the details needed to get our house sold. She is efficient and keeps the ball moving forward and remains calm and professional throughout the entire process. Marika did a great job keeping me informed about the details and what to expect next. I would not hesitate to use Marika’s services again.

Sylvia Baltzer

My wife and I recently had Marika Feibel do a comp check for our house in SE Ladd’s Addition and were very satisfied with her help and assistance during the process. Marika is a great communicator and helped walk us through the process in a way that was very easy to follow and understand. The comp check that she ran came in very close to the appraiser’s value and we left feeling good about the agreed-upon sale price. Marika was also the real estate agent that helped us find the house back in 2010 and we’ve also selected her to help us with the sale of our condominium on SW Jefferson St. We would highly recommend her to anyone.