Tax Implications for Selling Your Home

If you’re about to list your home, chances are you’re putting a considerable amount of time, work and energy into the process. You’re probably making a few updates to get your home open-house ready, and likely also busy trying to find a new home for you and your family. And with all this going on, you may even be worrying about one more thing: whether or not you’ll have to pay taxes on the profit, or gains, on the sale of your house.

As with any case, it’s best to consult a tax expert for tax advice, but here’s a quick look at the tax implications of selling your primary residence or a vacation home.

Will You Owe Capital Gains Taxes?

As it currently stands, home sellers aren’t responsible for paying capital gains taxes on the first $250,000 (individual) or $500,000 (married couple) in profit from the sale of their home, provided the home is their primary residence and that they have lived in it for two of the past five years.

If you do happen to have gains over either $250,000 or $500,000 though, you’ll have to pay some capital gains taxes. Depending on what tax bracket you fall into, the capital gains tax rate is either 0 percent, 15 percent or 20 percent. The way gains are calculated is by subtracting the purchase price from the sales price. You'll only have to pay capital gains taxes on anything above the $250,000 limit for an individual or $500,000 for a married couple. So if you're an individual who netted $300,000 in profit on the sale of your home, you'd only pay capital gains tax on $50,000.

According to a Zillow analysis, a seller that sold the median property in their city would pay capital gains tax after four years of ownership in just 14 of 6,949 cities nationwide. So needless to say, paying capital gains taxes aren’t the norm for many sellers. Unless you live in an extremely expensive market or own a home that has appreciated extraordinarily, you likely won’t have to worry about paying capital gains taxes on your home sale.

Other Taxes to Think About

Even if you won’t be paying capital gains taxes on the sale of your home, there are some other unavoidable taxes you’ll most likely have to pay. When it comes to property taxes, the seller is responsible for those taxes up until the date the house sells and the buyer assumes the taxes on the sale date and after. You might also be charged transfer taxes, which the seller pays to transfer the title from one person to another. This tax rate is relatively cheap at about 1 percent or less—give or take. If you are part of an HOA, you might have to pay all of, or a portion of HOA transfer fees in addition to membership fees if you move before you typically pay your dues.

While the tax rules for selling your primary residence are pretty straightforward, selling a vacation home or second home comes with a new set of rules.

Rules for Vacation or Second Homes

Depending on the nature of your vacation home or secondary home, and how it’s used, you might need to be prepared to pay capital gains taxes, as the exclusions that primary residences enjoy aren’t applicable to all homes. The Internal Revenue Service (IRS) considers vacation homes or secondary homes to be personal capital assets, which are subject to paying capital gains taxes once they are sold.

In some cases you may be able to defer paying capital gains taxes until a later time if you use your home sale proceeds to buy a “like-kind” investment property, thanks to IRC Section 1031. But remember, there are different tax rules depending on if your property is used as a personal vacation home, a property that is rented, or one that is held for investment, and you should consult with a tax expert about your particular situation.

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