Selling a house at a profit is a nice problem to have, but you'd probably like to keep as much of the proceeds as possible. To help you do this, the IRS lets you exclude a portion of your profit from capital gains taxes. Maximizing your deduction may require some strategy.
Prevent Capital Gains Tax on House Sale
If you are single and own your house alone, the IRS will let you exclude the first $250,000 of your gain from taxes. In other words, if you bought your house for $150,000 and sell it for $399,000, you won't owe anything, but if you sell it for $410,000, you'll have to pay taxes on the $10,000 over the threshold.
If you're married and file a joint return, however, you can exclude $500,000 of of capital gains tax on real estate. Another way of avoiding capital gains tax when selling your home is to own the house jointly with someone other than a spouse. In that instance, each of you could exclude $250,000 from your gain on your half of the house.
To qualify for the $250,000 or $500,000 exclusion, the house must have been your main residence for two out of the past five years before you sold it. In other words, if you haven't lived there for years, you'll have to pay more taxes on it.
Exceptions to the Rules
If you had to sell after less than two years, you might be able to get a prorated share of the exclusion if you had a good reason for selling like unmanageable medical expenses or a move for a new job.
Another exception that allows you to avoid capital gains tax when selling your home is to instead hold on to your home. You could turn it into a rental property and have it become an investment. If you need to pull money out of it, you can try to take out a cash-out refinance mortgage, which will be completely tax-deductible due to the tax rules about investment properties.
Current Tax Laws
The form you'll need to fill out is IRS Form 1099S. The biggest change for those filing their 2018 taxes is the tax brackets, so if you must pay capital gains on a home sale, your tax bracket may change, depending on your income. But if you are calculating your capital gains correctly, you may not need to pay this tax.
To determine your taxable profit, you don't subtract your purchase price from your selling price. From the perspective of the tax code, your selling price is what you sold your property for after paying commissions and closing fees. Your cost basis is what you paid for your property plus your closing fees plus the cost of any improvements that you made to your house. Calculating your capital gains on this basis should significantly reduce your profit and, hopefully, eliminate your capital gains tax liability.
For 2017 Filers
For those filing in 2017, if you do have to pay any capital gains taxes, your taxes will be figured according to the 2017 tax brackets. For most people, this will be slightly more according to the 2017 tax brackets than the 2018 tax brackets.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.