Tax season is upon us and if you have a pending or recent home sale, you’ll surely want to know: what income taxes will you have to pay on the sale?
The amount of taxes you’ll be responsible for depends on the length of time you’ve spent in the home. If your family resided in the home for two of the last five years, single homeowners can earn $250,000 tax-free! For couples filing jointly, that number grows to $500,000. If your home sale exceeds your allotment, you’ll have to pay capital gains taxes.
For homes owned less than a year, the regular tax rate applies.
Want to calculate your gain? Time suggests the following:
First subtract selling expenses, such as agent commissions and other closing costs, from the sale price. Then you need to calculate your “basis.” This is what you paid for your home, plus some of the closing expenses from the purchase, such as title insurance and recording fees (but not loan points or lender fees), and the costs of any permanent improvements, like a swimming pool or new addition. See IRS Publication 523 for complete details.
Exceptions to the two-year rule do exist, however. For those disabled, relocating for work more than 50 miles away, or for those needing to seek medical treatment for themselves or a relative, taxes on the profit can be pro-rated. It’s tricky territory though, so always be sure to consult a tax advisor.