How Much Tax Do I Pay When Selling My Home?

Buying a house is a great way to build wealth while enjoying the pride that comes with homeownership. When it comes time to sell, you need to attend to the fees you will incur, as well as the other costs.

The tax on a house sale is one of the biggest expenses involved. To plan for it, it’s important to know how much the tax is when selling a house and how that tax is determined. Below, we take you through the applicable taxes to help you avoid unexpected costs.

How Much Is the Tax on a House Sale?

The tax on selling a house depends on several factors:

The Capital Gains You Earned

Capital gains are the amount you sell the home for, less the amount you paid for it and any qualified expenses. The capital gains tax on a house sale is generally the biggest of the taxes you will pay on this transaction, but in some cases, this tax does not apply.

The Type of Property: Primary Residence, A Second Home, or an Investment Property

To qualify as your primary or principal residence, you must have lived in the home for at least two years out of the last five years before the sale. The two years do not need to be consecutive. In addition, the home must be your base, meaning that you receive mail there and use it for official purposes such as voter registration, your driver’s license, and your income taxes.

Whether You Qualify for an Exclusion

If the home is your primary residence, you might qualify for a home sale exclusion of up to $250,000 for a single filer and $500,000 if you are filing jointly. Using this exclusion, you may be able to avoid capital gains tax on your home sale entirely.

If you have to sell your home before you’ve lived there for two years due to a change of employment, health reasons, or unforeseen circumstances such as a divorce or serious property damage, you may still qualify for the exclusion.

If you still owe capital gains on the house sale after the exclusion, you can add the cost of improvements to your home’s cost basis. This will effectively reduce your capital gains. These improvements must add to the value of the house (ex: adding a second story or completely remodeling the kitchen) and does not include cosmetic fixes.

How Much Are Taxes on the House Sale of a Secondary Home or Investment?

If the home you’re selling is a second home, rental, or investment property, you don’t qualify for the capital gains exclusion discussed above. Here’s how capital gains tax on a home sale works if it’s not your primary residence:

• On the sale of a second home or vacation home that you use occasionally and never rent out, you pay capital gains tax on the home sale profit, just like an investment.
• If you’ve rented the home out and treated it as an investment, you pay capital gains tax, and you may also be subject to depreciation recapture tax on the depreciation you claimed while you owned the home. On the sale of this type of property, you may be able to defer the capital gains tax through a 1031 exchange, depending on whether the new property qualifies.
• If you buy a home, renovate it, and sell it without having lived there, the IRS may treat the profit as ordinary income. In that case, you will not pay capital gains tax on the home sale, but you may owe other income tax.

Other Taxes When Selling a House

On top of capital gains tax and closing costs,  you should also expect other taxes on selling a house, including:

• Property Transfer Tax

This is a tax levied by various levels of government (municipal, county, state) on the transfer of property titles from one owner to another. This tax is paid by the seller. Alaska, Arizona, Idaho, Indiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming do not charge this tax.

• Prorated Property Taxes

Property taxes up to the closing date are due at closing. The responsibility for this tax depends on whether and how much property tax was paid in advance.

How Much is Capital Gains Tax on a House Sale?

The capital gains tax on a home sale is a tax on the profit you made on the home—what you sold it for minus what you paid for it plus any substantial improvements. Short-term capital gains are taxed as ordinary income. This applies to a home you’ve owned for less than a year. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income.

Tax When Selling a House if You’re a Non-U.S. Resident

Non-U.S. residents selling a home in the U.S. are subject to a withholding tax under the Foreign Investment in Real Property Tax Act (FIRPTA). This tax is deducted from the sale price of the home at closing. The same capital gains tax rules apply to these sellers, and they must file a U.S. tax return for the year they sell the property. Most non-residents will be selling vacation homes or investment properties, so careful attention should be paid to the applicable taxation rules.

Getting Help Understanding the Tax on Your Home Sale 

Tax laws and regulations can be complicated, and most people want to reduce their taxes if possible. A qualified real estate agent can help you understand how the tax codes work and strategize with you to minimize the tax on your house sale.

If you’re selling more than one property within the space of two years, or you’re wheeling and dealing multiple properties, it may also be time to bring in a tax professional to help or possibly a real estate attorney.

The professionals at REMAX are always available to offer their expertise and guidance. Contact a REMAX agent today to talk about any matter related to real estate and capital gains tax on your home sale.