How to Calculate Income Tax Owed on a Home Sale

Selling your home might generate taxable income.
i Digital Vision./Photodisc/Getty Images

Selling your home can be an emotional time because of the memories you've made in it. If you live in a hot sales area, it can also be a boon for your bottom line. When you cash out, you may have to share some of the proceeds with Uncle Sam, but there's a special exception that might allow you to exclude all the gains from your taxable income.

Adjusted Basis

When you sell a home, you don't have to pay taxes on the entire amount of proceeds. Instead, your adjusted basis -- roughly what you put into the home -- is tax-free. Your adjusted basis includes the price you paid to acquire the home plus improvements you made to the property that last more than one year. For example, if you bought a home with an unfinished basement for $120,000 and finished the basement for another $10,000, your adjusted basis is $130,000.

Sales Proceeds

When you sell the house, you don't have to include the entirety of the final sales price. Instead, you get to write down the amount to account for any selling expenses, such as the commission to your real estate agent, or advertising you paid for if you sold the home yourself. The amount by which your sales proceeds exceeds your adjusted basis equals your taxable income. For example, if you sell the home for $150,000 but the agent takes a $3,000 commission, you're only credited with $147,000 of sales proceeds. If your adjusted basis is $130,000, you only have $17,000 of income.

Primary Residence Exclusion

If you qualify for the primary residence exclusion, chances are you're going to wipe out most if not all of your taxable gains. To qualify, you must have owned the home for two of the past five years and lived in it as your primary residence for two of the last five years. These two-year periods can, but don't have to, overlap. For example, if you bought the home two years ago and have lived in it as your main home ever since, you qualify. The exclusion lets you eliminate the first $250,000 of gain from your taxable income -- $500,000 if married filing jointly.

Tax Rates

If you don't qualify for the primary residence exclusion, or you have a massive gain on your home, you figure your tax bill based on the taxable income and the applicable tax rate. If you owned the home for less than one year, you pay taxes on the profits at your marginal tax rate -- just like you would other additional income. If you owned it for more than a year you pay the lower long-term capital gains rates. For example, as of 2014 if you sell a home you owned for more than a year, and you fall in the 25-percent tax bracket, you only pay 15 percent taxes on the home sale profits.

the nest