SmartAsset and Yahoo Finance LLC may earn commission or revenue from links in the content below.
When you sell a primary residence, the IRS allows you to exclude the first $250,000 of gain from your capital gains taxes if you file single, or $500,000 of gain if you file jointly. However, you must include the excess of these amounts in your taxable capital gains for the year. So what if you sell your house for a profit of $800,000? You’ll likely owe taxes on much of that sale, although you’ll get a significant tax break in the process.
Do you have questions about pension reduction or pension planning in general? Talk to a financial advisor today.
When you sell assets, including everything from real estate to investments and personal property, the profits are considered capital gains. The IRS calculates these profits as follows:
Sales price – Tax base = Taxable capital gains
The sales price is the amount you received for selling the property, and the tax basis is the amount of capital you invested in the underlying asset. For real estate this typically includes:
-
The price paid to purchase it, including legal fees, title insurance, and costs to set up necessary services such as utilities
-
Costs of improvements and upgrades to the building or property (generally considered to be any costs that improve the property or extend its life)
-
Some costs associated with selling the property, including estate agent fees, advertising and costs associated with viewing the property
However, this usually does not include property tax, financing or interest costs, usage and occupancy costs and necessary maintenance.
For example, suppose you buy a house for $500,000. You then have the following hypothetical expenses:
-
Mortgage interest of $40,000
-
$25,000 to renovate the kitchen
-
$10,000 to install a new boiler if the old one breaks
-
$6000 to repair a weak point in the roof
If you sell the house now, your cost basis will be $535,000, since the house cost you $500,000 and the kitchen and boiler both count as property upgrades ($25,000, plus $10,000). Even though the old boiler was broken, installing a new one instead of repairing the old one counts as an update.
Your financing costs do not count, nor do the necessary repairs you have made to the roof. Repairs are considered expenses to maintain the existing value of the property, and not upgrades to improve the value of the property.
If you later sell the house for $700,000, you would have $165,000 in potential taxable capital gains ($700,000 – $535,000 = $165,000).
If you have questions about retirement planning, consider talking to a financial advisor.
When you sell a primary residence, the IRS allows you to accept a home sale exclusion, also known as a Section 121 exclusion. Under this rule, you can exclude a certain amount of gain from the sale of your first home from your taxable capital gains. For individual filers, this amount is $250,000, and for joint filers it is $500,000.
To qualify for this exclusion, you must meet certain conditions. Most notable:
-
You must have owned the property for 24 of the past 60 months (can be non-consecutive)
-
You must have used the property as your primary residence for 24 of the past 60 months (can be non-consecutive)
-
You may not have claimed the exclusion from home ownership in the past two years
Individuals who meet these conditions can first eliminate the exclusion amount from the gain from their home sale and then include any remainder in their taxable capital gains for the year. Individuals who do not meet these conditions must include all their profits from the sale of the property in their taxable capital gains for the year.
For example, suppose you sold your home and netted $800,000 after deducting the property’s tax basis. Here’s how you would break this down:
-
Like your home is not eligible for the Section 121 exclusion, you have a taxable capital gain of $800,000.
-
Like your home is eligible for the Section 121 exclusion, you have taxable capital gains of $550,000 as a single filer ($800,000 – $250,000 = $550,000) or $300,000 as a joint filer ($800,000 – $500,000 = $300,000)
The advantage of the home sale foreclosure is that it is simple and provides a significant amount of money. Most households will be able to avoid tax on much or all of the profits from the sale of their home under this law, and the rules are very simple. Consider consulting a financial advisor to plan a tax strategy for the sale of your home and beyond.
When you sell your home, you can take an exclusion of $250,000 (single) or $500,000 (joint) from your capital gains. You will then have to pay tax on any remaining profits from the sale. This is a significant and obvious tax benefit, but it will mean at least some taxes on particularly high-profit sales.
-
A financial advisor can help you create a comprehensive retirement plan that includes downsizing. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
For many households, their home is their most valuable asset. That can be a very good thing, because you literally have a strong pension plan, but it also requires careful management. If you’re considering selling your home, consider these steps to ensure you do so carefully.
-
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
-
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
©iStock.com/andresr, ©iStock.com/twinsterphoto
The post I sell my house and receive $800,000. Can I Avoid Taxes While Downsizing for Retirement? first appeared on SmartReads by SmartAsset.
