If you’re selling your home, you likely just want to get it over with and get started on the new chapter in your life in your new home. But hold on – you may have to deal with the tax man. If you made a profit on the sale of your home, you may to pay capital gains taxes. Having some understanding of the pertinent tax rules can help you minimize your tax bill. So let’s take a look at the tax implications of selling your home in California.
The Likelihood of Paying Taxes on the Sale of Your Home
If your home as appreciated significantly, as is often the case, you’ll get a large payday when selling your home in California. But you will also probably owe the IRS money for the profits earned on the sale. For you home is an asset and so is subject to capital gains taxes.
“The biggest question at tax time for someone who recently sold a home is whether they’ll have to pay federal capital gains taxes on the profit. In short, capital gains are the amount of money you make from selling capital assets – property like homes, cars, investments, and other high-value items.”
Consider, too, that home prices rose dramatically between 2020 and 2022. And that means your home probably experienced significant capital gains. So, yes, it’s very likely that you will have to pay taxes when you sell your home.
How Capital Gains Taxes Work
Now, let’s look at how capital gains taxes work and how they apply when selling your home.
“A capital gains tax is a tax placed on any profits earned when a capital asset is sold. The IRS considers almost everything you own and use for personal or investment purposes to be a capital asset. These taxes are due on the tax deadline after the asset is sold, and it applies to investments like stocks, bonds, and real estate.”
In addition, the IRS has two categories for capital asset gains: short-term gains and long-term gains. When it comes to selling your home, if you’ve lived there for less than a year, you’ll have a short-term gain. If you’ve lived in your home for a year or longer, the gain is considered long-term. When you sell your home, then, “the capital gains tax depends primarily on how long you’ve owned the home and your income.”
“If you have a short-term gain, you’ll be taxed at whatever your normal tax bracket is. A long-term capital gain gets preferential tax treatment and is taxed at a rate of 0%, 15%, 20%, or 28%. These rates vary according to your income and tax filing status. . . . And if you meet certain conditions, you can exclude the first $250,000 to $500,000 from the sale of your home and avoid paying taxes on it altogether.”
How to Avoid Capital Gains Tax
When selling your home, you may indeed be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller.
According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”
For such an exclusion, you’ll have to meet these qualifying criteria . . .
- “You’ve owned the home for at least two years during the past five years prior to the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
- The home was your principal residence for a minimum of two of the five years prior to the sale. For those married and filing jointly, both spouses must meet this requirement.
- “You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.”
If you think you may qualify, be sure to consult a California agent. To discover more, call (844) 932-8943.
Special Circumstances
Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in California. The special qualifying circumstances here include . . .
- Gaining ownership of the home during a separation/divorce
- If your spouse died during your ownership of the home
- Owning a “remainder interest” in the home when selling
- Having your previous home condemned
- Being a service member during your ownership of the home
- Releasing the home in a “like-kind” exchange
Calculating Capital Gains Tax
If, on selling your home, you want to calculate your probable capital gains tax, you will need to determine the cost basis for the home.
The cost basis includes what you spent to buy the home, as well as any money spent on improvements over the years. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”
“From there, you can add up the purchase price of the home, minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale.” This will yield the amount subject to capital gains tax.
Get Professional Assistance
If this capital gains tax business seems complex and complicated, that’s because it certainly is. So when selling your home, be sure to consult a tax professional and an experienced California investor. We can guide you through the basics to help you arrive at the best outcome when you sell your home. So if you have concerns about the tax implications of selling your home in California, be sure to contact us at (844) 932-8943.