Tax considerations when selling a home

Key insights:

• When you sell your home, you’ll need to determine if you owe the IRS any of the profits from the home sale.
• For primary residences, if you meet certain requirements, capital gains taxes will be charged if your profits exceed $250,000 (as an individual tax filer) or $500,000 (as a couple filing jointly).
• Those who own vacation home properties or investment properties typically have to pay capital gains taxes from their total home sale profit.

If you’ve sold your home in the last tax year, there could be tax implications for you to consider this spring. Here are insights you can use to determine how your home sale will factor into your tax payments.

Capital gains taxes on your home sale

After you sell your home, you may worry about having to pay capital gains taxes, which is when the IRS charges a taxon the profit of your home sale. Keep in mind that if the home you sold was your primary residence for two or more years*, you will only be charged capital gains taxes on:

• Profits exceeding $250,000 if you are filing solo or a couple filing separately.
• Profits exceeding $500,000 if you are filing jointly.

For example, if you are filing your taxes solo and you have just sold your primary residence for $750,000 after paying $525,000 for it, the profit from the sale would be $225,000. That’s a tax-free gain! However, if you sold the same home for $800,000, then your profit would be $275,000. The first $250,000 would be tax-free, and you would be taxed on the remaining $25,000.

In both Minnesota and Wisconsin, it’s quite common for home sellers to earn a tidy profit on their home sale and still not meet the threshold that would require them to pay capital gains taxes.

*Note: The IRS’ fine print says that property owners looking to qualify for this exclusion must have owned the property for at least two of the last five years; have lived in the home for two of the last five years; and have not taken advantage of the capital gain exclusion from the sale of another property in the last two years.

Raising your cost basis to lower your capital gain

As you now know, the capital gain of a home is typically assessed by comparing the price you paid for your home (the cost basis) to its final sales price. However, if you’ve made significant improvements to the property, you may be able to adjust your cost basis.

If you’ve replaced the windows and finished the basement, be sure to tell your tax professional about the cost of those repairs so they can adjust your cost basis. By increasing the price you’ve paid into your home, you’ll decrease the total capital gains on the property.

However, note that the IRS doesn’t count basic upkeep — like hiring a plumber to sweep the drains or adding new carpet — as eligible home improvements for adjusting your cost basis. They require the improvements to be more significant, such as a full basement remodel, replacing a plumbing system or adding a deck or bedroom to the property.

Considerations for second-home owners

The IRS has set up this threshold on capital gains taxes to assist homeowners who are selling their own primary residences. They do not offer similar accommodations to those selling a vacation home or investment property, which means that when you choose to offload a second or third home, you will likely face a higher tax burden than if you were to sell your primary residence.

Some homeowners choose to move into their investment or vacation property for two years before selling to minimize the total tax payment they will make to the IRS after their home transaction is complete. If you are intending to buy a new investment property with the funds from the sale of your existing one, you may be able to delay the tax payment by doing what’s called a 1031 exchange. You will need a professional who does those exchanges to assist you.

Prepping to sell?

If you haven’t yet sold your home, get in touch for help from a qualified Edina Realty REALTOR in your area. Reach out today to get started with a local professional who can help you prepare and sell your home for top dollar.