It’s tax season! And if you’re selling your home this spring, it’s important to understand how that might affect your taxes now, and a few years down the line.
Below, we’ll explain everything you need to know about home sale taxes and how to make the most out of your sale.
Do I have to pay taxes on selling my house?
When you sell your home, you might have to pay taxes on the money you earn when it’s sold. However, there are workarounds and exceptions that could allow you to pay a little less, or nothing at all. If you’ve lived in your home for two of the five years before the sale, the first $250,000 of profit made on the home is tax free. However, that tax free amount doubles that if you’re married and you or your significant other files a joint tax return. It’s important to understand that this is classified as profit, not income. This means tax is based on the net amount that you get from selling your home (after expenses), not on the total amount you make from selling your home.
How do I know the profit on my home sale?
The first step in determining whether or not you’ll pay taxes is calculating the profit made on the home. Unfortunately, it is not as easy as just subtracting the price you paid from the sale price. Start by figuring out the cost basis for your home. This includes the price of the home itself, and home improvements. For example, say the original purchase price was $300,000, but you spent $30,000 adding another room to the house. That money spent to create the new room will be added to your cost basis. Now that you’ve done that, figure out how much you sold your home for. And then subtract any fees that were paid, like closing costs, realtor fees, etc. Then, subtract your cost basis from the total amount of money earned from the sale.
How do I qualify for tax breaks?
There are a few requirements you need to meet to qualify for a tax break.
- You must have owned the home for two years.
- The home was your primary residence for two years. That means any second homes (like a vacation home), will not qualify for the tax break.
- You haven’t used this tax break in the past two years.
You can also qualify for a reduced exclusion. This allows you to claim part of the tax break, regardless if all the requirements above are met. For example if you’ve only lived in your home a year, you could be exempt for just $125,000 of any profit made from your home sale. You should have a valid reason to qualify for this, like employment changes, medical problems, etc.
How do I report the sale on my tax return?
Overall, you do not have to report your home sale on your tax return if your profit on the home sale is less than the exemption amount, and you meet those other qualifications. If you receive a Form 1099-S, you will need to report the home sale. This form is given to you when the home sale is made, unless your real estate agent is assured that you won’t owe taxes on your profit.
In all, chances are you won’t have to pay taxes on the sale of your home, but the above tips will keep you prepared if the situation arises.
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