TAXES AND HOME SALES FYI
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Not everyone will owe taxes for the sale of their home — there are plenty of exceptions and personal circumstances that will impact your tax liability. There are three types of taxes to consider when selling your home:
- Capital gains tax
- Property tax
- Real estate transfer tax
If I sell my house, do I pay capital gains tax?
Some homeowners will owe capital gains tax on selling a home if they don’t qualify for an exclusion or special circumstance. Generally speaking, it’s easier to minimize or eliminate capital gains taxes on a primary home than a vacation or rental property.
Bear in mind that even if you qualify for a capital gains tax exclusion, you can’t qualify for another exclusion for at least two years.
Capital gains tax exemption
Many homeowners avoid capital gains taxes when selling their primary home, but there are stipulations. First, you must have lived in the home for at least two of the last five years of ownership. And the profits are taxable if they exceed $250,000 for single filers or $500,000 for joint/married filers.
For married couples filing jointly, you must file a joint tax return, and one spouse needs to have owned the property for a minimum of five years, with both spouses living in the house for two of the last five years.
If your profits do exceed the exemption amounts, here’s the rate you can expect to pay on any profits above $250,000/$500,000. These rates assume you have owned the home for at least a year. If you have owned for less than a year, you’ll be taxed on the gains at your regular income tax rate:
| Income – single filers | Income – married filing jointly | Long-term capital gains tax rate |
| $0 to $39,375 | $0 to $78,750 | 0% |
| $39,376 to $434,550 | $78,751 to $488,850 | 15% |
| $434,551 or more | $488,851 or more | 20% |
Other capital gains tax rules
If you don’t qualify for the tax exclusion above, consider one of the other special considerations the IRS allows for when calculating capital gains taxes.
Divorce: If you acquired the home in a divorce, you can use the time your ex-spouse lived in the home as their primary residence toward the residency requirements.
Death: If one spouse dies, you can count the time the deceased person lived in the home to qualify for the exclusion, as long as you didn’t remarry.
Qualified official extended duty: If you work for a military or government intelligence agency and were stationed 50-plus miles from home or living in required government housing, you can get the two-year minimum waived.
Can I qualify for a partial capital gains tax exclusion?
Even if you can’t exclude all of your home sale profit, there are other scenarios where you may be able to partially lower your taxable profit. If you experienced any of the below life events, you may be able to get a partial exclusion, calculated based on the percent of the two years that you lived in the home.
- Job change/relocation
- Health issue that requires moving
- Divorce
- Having twins or triplets
How do I know if I owe capital gains taxes on selling my home?
Generally, anyone who receives a Form 1099-S: Proceeds from Real Estate Transactions at closing will owe some sort of capital gains tax on their home sale and will be required to file home sale profits on their tax return. A copy of the 1099-S is sent to the IRS too.
If you receive a Form 1099-S and believe you could qualify for any capital gains tax exclusions, talk to a pro before closing, like your real estate agent or attorney, so you can avoid having the form filed. If you receive the form in error, make sure you can document how you qualify, and talk to your accountant or attorney about how to handle reporting the home sale on your taxes.
Will I owe taxes on selling a second house?
The above capital gains exclusions apply only to primary residences, so any second home or investment property will be subject to capital gains taxes, at any amount of profit. But there are a few things you can do to minimize the burden.
Convert the home to a primary residence
Move into the second home or rental property. By making it your primary residence, in two years you’ll be able to sell while taking advantage of capital gains exclusions.
Do an IRS Section 1031 exchange
A 1031 exchange allows you to roll over profits from a second home sale into another investment property within 90 days of selling and defer capital gains tax liability. This is a complicated process that requires an intermediary to manage the rollover, and you’re required to follow specific guidelines. For example, 1031 exchanges are only available on rental properties (not primary homes or vacation properties), so if you want to take advantage of this tax-deferred exchange, you’ll need to convert the property to a rental property first. And you’re limited to doing one 1031 exchange every five years.
If you’re interested in doing a 1031 exchange, talk to your real estate agent, tax professional and attorney first.
Report losses to offset profits
Make sure to report other capital losses you’ve had in the same tax year to offset your capital gains.
How to calculate capital gains tax
If you won’t qualify for any capital gains tax exemptions, it’s best to know how much you’ll owe ahead of time so you have a better idea of your final profit. Here’s how to calculate it.
Figure out your cost basis
Your cost basis is the original purchase price of your home, plus any money you’ve spent on improvements that you did not previously deduct for tax purposes.
For example: You purchased the home for $200,000 and put $50,000 into improvements, making your cost basis $250,000.
If you converted a rental property into your primary residence, your basis would be the lower of your original purchase price or the fair market value of the home on the date you converted its use. You will still increase the basis by any money spent on improvements.
Calculate net proceeds
Your net proceeds are the sale price of the home minus any commissions and fees.
For example, if your home sells for $300,000 and your closing costs are 10% of the purchase price ($30,000), your net proceeds will be $270,000.
If you’re selling a second home or don’t qualify for a capital gains exclusion on your primary home, your taxable income is your net proceeds minus your cost basis.
So if your net proceeds are $270,000 and your cost basis is $250,000, you’ll be responsible for capital gains taxes on $20,000 of profit. At the 15% capital gains tax rate, you’ll owe $3,000 in the year you sold the home.
Do I pay property tax when I sell my house?
Yes. At closing, you’ll pay taxes prorated up to the closing date (your buyer will take over property taxes once they take possession). If your mortgage lender handles your property tax payments for you, you can expect to see the amount as a line item in your payoff settlement statement.
Most property taxes are paid in arrears, which means you pay after the fact for charges that are already accrued. And most property taxes are charged on a twice-yearly basis, so it’s likely you’ll have to pay a prorated portion of your six-month tax bill at closing.
Property tax rates by state
The property tax rate can vary based on the state where you’re selling. Here’s a quick summary of the highest and lowest property tax states:
States with highest effective property tax rates:
- New Jersey: 2.44%
- Illinois: 2.31%
- New Hampshire: 2.20%
- Connecticut: 2.07%
- Wisconsin: 1.94%
States with lowest effective property tax rates:
- Washington, D.C.: 0.55%
- Colorado: 0.55%
- Louisiana: 0.52%
- Alabama: 0.42%
- Hawaii: 0.27%
What is real estate transfer tax?
Among other selling-related costs and fees, sellers are responsible for paying real estate transfer taxes, which are also called a government transfer tax or title fee. The transfer tax on selling a house is calculated as a percentage of the sale price. The rate varies widely by state, and even from one city to the next. And some places have no transfer taxes at all.
- The median transfer tax in the U.S. is $745.
- In Seattle, the real estate transfer tax on a median-valued home is $8,749.
- In Washington, D.C., the real estate transfer tax on a median-valued home is $5,886.
- St. Louis and Portland, among other cities, have no transfer taxes.
Here are the median transfer taxes for the largest 35 metro areas:
| Metro area | Median transfer tax |
|---|---|
| Seattle, WA | $8,749 |
| Washington, D.C. | $5,886 |
| Philadelphia, PA | $2,328 |
| Boston, MA | $2,125 |
| Miami, FL | $1,987 |
| New York, NY | $1,756 |
| Orlando, FL | $1,660 |
| Tampa, FL | $1,493 |
| Pittsburgh, PA | $1,442 |
| Las Vegas, NV | $1,423 |
| Detroit, MI | $1,379 |
| San Jose, CA | $1,369 |
| Baltimore, MD | $1,340 |
| San Francisco, CA | $1,054 |
| Minneapolis, MN | $886 |
| United States | $745 |
| Los Angeles, CA | $718 |
| San Diego, CA | $651 |
| Sacramento, CA | $450 |
| Charlotte, NC | $413 |
| Riverside, CA | $404 |
| Columbus, OH | $380 |
| Cincinnati, OH | $338 |
| Chicago, IL | $337 |
| Cleveland, OH | $292 |
| Atlanta, GA | $218 |
| Denver, CO | $41 |
| Portland, OR | $0 |
| Austin, TX | $0 |
| Phoenix, AZ | $0 |
| Dallas, TX | $0 |
| Kansas City, MO | $0 |
| Houston, TX | $0 |
| San Antonio, TX | $0 |
| Indianapolis, IN | $0 |
| St. Louis, MO | $0 |