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When you sell your primary home, the IRS allows you to exclude a significant portion of the profit from your taxes. This exclusion – $250,000 for single filers and $500,000 for married, joint filers – is large enough that many sellers don’t end up paying federal taxes on the capital gains from a home sale. But if you’re netting $620,000 from the sale of your house as you downsize for retirement, you will probably owe capital gains taxes on some of that profit.
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When you sell an asset, including real estate, you may owe capital gains taxes on the profit from the sale. The capital gain can be calculated by simply subtracting the assets cost basis from its sale price.
In the case of real estate, you’ll have to calculate the property’s adjusted cost basis – the amount you paid for the home, plus any additional investments or improvements that you made to it. This can include any upgrades, expansions or additions that you’ve made to the property. It does not include repairs and maintenance, interest payments or temporary changes.
Essentially, if you spent money to improve the property’s value, expand its utility or extend its lifespan, you can add that to the property’s cost basis. If you spent money to maintain the property’s status quo, you cannot.
For example, say that you spent $500,000 on a house. Then, you spend $50,000 to renovate the kitchen and $10,000 on a new roof. You later sell the house for $700,000. Your taxable capital gain would be: $700,000 – ($500,000 + $50,000 + $10,000) = $140,000.
If you need help calculating your capital gains or planning for taxes, consider speaking with a financial advisor.
When you sell a primary residence, the IRS allows you to exclude a considerable chunk of the profit from your capital gains taxes and only pay taxes on the remaining net profit. This exclusion is $250,000 for single filers and $500,000 for married couples filing jointly.
For example, say that you are a single filer and you sell your home and make $300,000 in profit. After the exclusion, you would owe taxes on just $50,000 ($300,000 capital gain – $250,000 exclusion). Again, note that this is not the amount you owe, just the remaining amount on which you pay taxes.
This is known as the Section 121 Exclusion. While you can find the full details in Publication 523, to qualify for this exclusion you generally must be selling your primary home (so, not something like a vacation house or an investment property). You must have owned and used the house as your primary residence for at least 24 out of the last 60 months, although this time does not have to be consecutive. And in most cases, you won’t qualify for a Section 121 Exclusion if you’ve taken one in the previous two years.