Here’s When You’ll Owe Taxes After Selling a House

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You may or may not have to pay taxes on a home sale. Read on to learn how capital gains taxes work for selling your house. 

You may not qualify for the exclusion or your profits may exceed the exempt amount.

When you list your house on the market, the goal is to find someone who is buying a property who will pay you a fair price for yours. Ideally, you will get a great offer, make enough money to pay off your mortgage loan, and even make a tidy profit.

But, what happens if you do make money off selling your home? Will you owe taxes on the gains? Here’s what you need to know.

You may owe capital gains taxes on the profits from a home sale

Whether your home was a place you lived or an investment, you can still potentially owe taxes when you sell it for a profit. That’s because the money you make is considered a capital gain.

If you buy something and you sell it for more than you paid for it, the IRS wants a cut of the money that you made. The profits from the sale (minus certain expenses that you incurred) can be subject to capital gains taxes. Depending on how long you owned the property, you could end up having to pay either short-term capital gains taxes (which means you would be taxed at your ordinary income tax rate) or long-term capital gains taxes.

If you have owned your home for at least a year, then you’d pay taxes on profits at the long-term capital gains tax rate. This is lower than your ordinary income tax rate and, for many people, their long-term capital gains tax rate is as low as it can go. That’s because the long-term capital gains tax rates are typically either 0%, 15%, or 20% depending on your earnings (although there are different rates for investment properties).

It’s important to consider how long you’ve owned the property, whether it was a personal or an investment property, and how much of a profit you made minus expenses, so you’ll understand if you may owe taxes.

You can qualify for an exclusion

While capital gains taxes can be charged on profits from a home sale, in practice, many people do not end up paying them. That’s because of something called a Section 121 exclusion. This tax rule allows you to exclude up to $250,000 in gains from the sale of a home from your income, or up to $500,000 if you are married and file taxes jointly with your spouse.

In order to qualify for this exclusion, you must have owned the home and used it as your primary residence for at least two out of the prior five years. These two years do not have to have been the same periods, but you must fulfill both requirements unless you fall within a limited exception, such as those who are performing qualified military service, who are able to suspend the five-year test period for as long as a decade.

Since many people do meet these requirements, there’s a good chance the sale of your home will go untaxed. If you don’t, though, or if your profits exceed the excludable amount, you need to be ready to write a check to the IRS. Don’t let this come as a surprise, especially if you make a big profit and could have a hefty bill to pay.

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