If you are selling a home you have owned for a long time, it is likely worth more than it was when you bought it. You may have a tax liability if your home has appreciated in value. If you have not sold a primary residence in the last 27 years, the rules pertaining to taxes and home sale taxation may be different than you remember.
This article focuses on the sale of primary residences, which have unique rules compared to other types of properties.
Sensible Financial does not give tax advice and we recommend that you consult your CPA or a qualified tax accountant for a detailed assessment of your personal situation.
How much is the taxable gain?
You may owe capital gains tax on the sale of your primary residence if you sell the property for a value that is greater than your cost basis. For most people, your home’s cost basis is the price you paid for the home (including some types of closing costs like legal fees, inspection fees, etc.) plus the cost of any qualifying capital improvements that you made. You can further reduce your taxable gain if you qualify for the exclusion detailed later in this article.
You may also wish to speak with a tax professional if you have any special circumstances such as depreciation taken on a home office, casualty losses, or insurance payments to consider factoring into this calculation.
What qualifies as a capital improvement?
Capital improvements must be permanent structural alterations or repairs that improve the property substantially (thereby increasing the property’s value), prolong its useful life, or adapt it to a new use. Any capital improvements added to your home’s cost basis must also still exist when you sell the home. Examples of qualifying capital improvements include a new addition, finishing a basement, replacing your entire roof, or installing a new heating system. Maintain records of receipts and purchase orders for these improvements so you can determine and prove your basis when/if you sell your home in the future.
Capital improvements do not include repairs or basic maintenance. Repairs and basic maintenance are returning something to its original condition, rather than making an improvement. Examples of repairs or basic maintenance include painting your home, repairing a few shingles on your roof, or fixing a leak.
How does a mortgage factor into my tax liability?
A mortgage has no impact on your tax liability. The calculation is based on the cost basis of your home, which is unchanged whether you own 50% or 100% of your home.
Will I qualify for an exclusion?
An exclusion may be available if you are selling your primary residence (or a home that has been your primary residence in the recent past). The exclusion allows single tax filers to exclude from your income up to $250k of gains from the sale of a primary residence ($500k of gains for married filing jointly).
Here are the conditions that must be met to allow you to qualify for the exclusion:
- You must have owned the home for at least two of the last five years
- You must have lived there as a primary residence for at least two of the last five years
- You did not acquire the home through a like-kind exchange (1031 exchange) during the past five years
- You did not claim any exclusion for the sale of another home that occurred during a two-year period ending on the date of the sale of the home
Unlike the prior rules, you DO NOT have to invest the proceeds of the sale into the purchase of a new house (this was the law prior to May 7, 1997) to qualify for an exclusion amount. This “rollover rule” no longer applies.
Several exceptions may allow you to qualify for a partial exclusion if you do not meet all the required conditions.
- You have a change of employment if new employment is at least 50 miles further away from your home
- You have a medical need that requires you to move
- You have some other unforeseen circumstances (as defined by the IRS) such as divorce
Unfortunately, you cannot claim a loss if you sell your primary residence for less than the purchase price plus the cost of capital improvements.
When will you owe taxes?
If your sale price is greater than your cost basis plus closing costs and the applicable exclusion, the difference may be a taxable gain. The associated taxes will be owed by the tax deadline on April 15th of the year following the sale. For example, if you sold a home on January 1st, 2024, taxes owed on the sale are due by April 15th, 2025. Importantly, you should consider speaking with an accountant to make sure you are paying enough in taxes throughout the tax year to avoid underpayment penalties. If you have a substantial gain, paying estimated taxes may be appropriate.
What tax rates apply?
If you have owned the home for more than a year, then long-term capital gains rates apply.
| Federal Long-Term Capital Gains Rates for Tax Year 2024 | ||||
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | Up to $47,025 | Up to $94,050 | Up to $47,025 | Up to $63,000 |
| 15% | $47,026-$518,900 | $94,051-$583,750 | $47,026-$291,850 | $63,001-$551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $291,850 | Over $551,350 |
If you have owned the home for less than a year, then short-term capital gains rates apply, which are the same as ordinary income rates.
| Federal Ordinary Income Tax Rates for Tax Year 2024 | ||||
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0-$11,600 | $0-$23,200 | $0-$11,600 | $0-$16,550 |
| 12% | $11,601-$47,150 | $23,201-$94,300 | $11,601-$47,150 | $16,551-$63,100 |
| 22% | $47,151-$100,525 | $94,301-$201,050 | $47,151-$100,525 | $63,101-$100,500 |
| 24% | $100,526-$191,950 | $201,051-$383,900 | $100,526-$191,950 | $100,501-$191,950 |
| 32% | $191,951-$243,725 | $383,901-$487,450 | $191,951-$243,725 | $191,951-$243,700 |
| 35% | $243,726-$609,350 | $487,451-$731,200 | $243,726-$365,600 | $243,701-$609,350 |
| 37% | Over $609,350 | Over $731,200 | Over $365,600 | Over $609,350 |
Your long-term capital gains and short-term capital gains tax brackets are dependent on your total taxable income (including the capital gains).
A few additional categories of tax may apply such as state and local taxes and an additional 3.8% Medicare tax.
Understanding the factors that impact your potential tax liability can help you better estimate your after-tax proceeds
Your potential tax liability from selling your primary residence depends on several factors. A tax professional can be very helpful navigating the complexities of the tax code and incorporating your personal situation. Understanding this information can help you be better informed of the potential net sale proceeds after accounting for your potential tax liability. Publication 523 from the IRS provides detailed information on selling your home and all the subjects discussed in this article.
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