Selling a home is a big decision to make with a number of complicated variables. It’s also a decision that most people will only make a few times in their life. That means that most homeowners aren’t exactly clued in to the rules regarding taxation for a home sale. Fortunately, it’s a pretty simple affair. And while 2018 saw a change to mortgage deductions, the rules behind taxation have gone unchanged. Here’s all you need to know if you’re trying to sell your home.
While selling real estate is taxed by default, the fact is that most people who sell their home never even have to pay taxes for the transaction. That’s due to the Taxpayer Relief Act of 1997 which allows sellers to exclude the first $250,000 from their sale. That number raises to half a million for married couples filing jointly. That means that as long as your home is underneath that threshold, you shouldn’t need to pay taxes. Anyone selling a home over that value will only need to pay taxes on the excess cost of their home. It’s worth noting that deductions can’t be made when selling a primary residence.
That said, there is one minor provision to the Taxpayer Relief Act. To be eligible, you must have lived in the home as your primary residence for two of the past five years. But if you haven’t lived in your home for that long, you may still be eligible for a prorated exclusion. These exclusions are typically offered in circumstances of financial hardship such as unemployment, illness, or other unavoidable and extenuating circumstances.
If you aren’t eligible for the tax deduction, calculating your taxes is a fairly easy process. Taxes are determined by the difference of the selling price of your home and the cost basis of your home. Cost basis can be a bit complicated, as it isn’t actually evaluated at the price you bought your home. The cost basis can be adjusted according to various improvements made to your house. These could include anything from roofing repairs to additions. If your selling price is higher than your cost basis, you’ll only be charged taxes on the difference. Unfortunately, the exact parameters for adjusting your cost basis can be complicated, and that’s why you may want to work with an attorney to understand the best course of action to minimize your tax liabilities.