The Florida real estate market is hotter than ever, so if you’re considering selling your home, now is a good time to do it. And as you sit back and watch those offers roll in, you’ll likely get way more than what you originally paid for the house, even more than the asking price! This is all great, but will you owe the IRS taxes after you sell?
The short answer is…maybe.
The financial experts at Maggi Tax Advisory & Financial Group explain potential tax implications from selling a home and strategies used to minimize the tax burden.
Capital Gains Exclusions
A capital gain occurs when you sell an asset for a net profit, i.e., selling a home. Fortunately, the IRS allows a loophole known as the “home sale gain exclusion” (a.k.a. “primary residence exclusion”) that allows sellers who file joint tax returns to exclude up to $500,000 in capital gains from taxation on the sale of a primary home. Single filers can exclude up to $250,000. To qualify for this exclusion, certain criteria must be met:
- The home must have been a primary residence for at least two of the preceding five years.
- The home must have been owned for at least two of the preceding five years *Ownership and residency requirements do not have to happen the same two years.
- You cannot claim an exclusion on another home within two years of the sale.
Cost Basis & Net Proceeds
Here’s where things get a little complicated. To figure out the capital gain, there’s more involved than just taking the home’s sale price and subtracting the original purchase price. The capital gain is the difference between your cost basis and net proceeds. We’ll explain.
Cost Basis: This is the amount you paid to acquire an asset, including acquisition costs or capital improvements or value-adding improvements such as renovations, appliance upgrades, additions, and more.
Net Proceeds: This is the amount you sold your home for, after calculating selling-related expenses such as real estate commissions.
Example: You bought your home for $200,000 and sold it for $300,000 three years later for a “gain” of $100,000. However, let’s say you paid $5,000 in origination fees and another $20,000 in realtor fees. Now your capital gain is reduced to $75,000.
How to Avoid Paying Capital Gains Tax After Selling a Home
Aside from the home sale gain exclusion, there are several other ways you can potentially avoid paying capital gains taxes on the sale of a home, some of which include:
1031 Exchange: If you are selling an investment property, you can avoid a big capital gains tax bill by submitting a 1031 Exchange – a strategy that involves selling an investment property and using the proceeds to purchase another.
Tax-Loss Harvesting: Another effective way to avoid paying capital gains tax on a home sale is to have other losses that offset its value. This is a strategy called tax-loss harvesting and involves the sale of a poorly performing asset (i.e., stock, mutual fund, etc.) at a loss that will help to offset capital gains taxes.
Confused about paying taxes on real estate? Ask the experts.
Capital gains taxes from the sale of a home can get complicated! When in doubt, contact a knowledgeable financial expert, such as Maggi Tax Advisory & Financial Group, who can offer strategies to minimize your capital gains tax bill. To learn more about our services, please call our Hillsborough office at (813) 850-0131 and our Pinellas/Pasco office at (727) 351-6168.