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I sell my house and receive $435,000. Should I worry about capital gains taxes?

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Capital gains tax is levied on the profit from the sale of a house. This sale counts towards your total capital gain for the year and is taxed at the normal rates of 0%, 15% or 20%.

That said, when it comes to home sales, the IRS allows you to exempt some of the profits from your taxes. If you sell your primary home, you can exempt up to $250,000/$500,000 (single/married) from your taxes over your lifetime.

For example, suppose you sell your house for a profit of $435,000. As an individual, you will likely owe taxes on $185,000 of these winnings if you have not previously used this exemption. Here’s what you need to know. You can also match with a financial advisor who can help you apply the rules to your own situation.

When you sell real estate, any profits you make are taxed as capital gains.

Profit in this case is defined as your sales price less the property’s tax basis. The tax basis of a property is based on several factors, but generally it is the total amount you spent to buy, upgrade and sell the property. This may include, but is not limited to:

  • Original retail price

  • Additions, changes and updates

  • Staging, fees and related costs of the sale

  • Depreciation or loss of value

Crucially, this excludes maintenance and upkeep. For example, replacing your washing machine as soon as it stops working properly does not count as an upgrade. Your cost basis increases with money that adds to the overall value of the property, such as a bathroom renovation or adding a room. This is called “qualified expenses.” So for each property, your profit (or ‘taxable profit’) is calculated as follows:

For example, suppose you spend $450,000 to buy a house. You then spend $15,000 on modernizing and expanding the kitchen. Right now, your cost basis for the house is $465,000. If you sell the house for $500,000, your profit will be $35,000 ($500,000 – $465,000).

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Any profits from the sale of real estate, including a home, are taxed as capital gains. This means they will be subject to a lower tax rate, separate from income tax, although your capital gains rate is determined by your total taxable income. For most households, the capital gains rates are:

  • 0%: up to $47,025 single / up to $94,050 joint

  • 15%: $47,025 – $518,900 single / $94,050 – $583,750 joint

  • 20%: $518,900+ single / $583,750+ joint

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