Selling a home is a major financial milestone, but it can also bring up many questions about taxes—especially when it comes to capital gains. Homeowners often feel unsure about how these taxes work and whether they’ll owe anything after their sale. Let’s address some of the most common questions to clear up the confusion.

What Are Capital Gains Taxes, and When Do They Apply? 

Capital gains taxes apply to the profit you make when selling an asset, like real estate. For homeowners, these taxes may be owed if you sell your property for more than your adjusted cost basis (the original purchase price plus qualifying improvements). However, most homeowners selling their primary residence don’t pay capital gains taxes, thanks to an exclusion introduced in the 1997 Taxpayer Relief Act.

How Much of the Profit Is Tax-Free?

Homeowners can exclude up to $250,000 in profits ($500,000 for married couples filing jointly) from capital gains taxes when selling their primary residence. To qualify, you must have lived in the home for at least two of the past five years. If your profits exceed the exclusion threshold, only the amount above the limit is subject to taxes.

Can I Qualify for a Partial Exclusion? 

If you sell your home before meeting the two-year residency requirement, you might still qualify for a prorated exclusion. This applies if the sale is due to unforeseen circumstances like a job relocation, medical reason, or other hardship. For example, if you lived in the home for one year, you could exclude half of the eligible profit ($125,000 for single homeowners or $250,000 for couples).

What Is the Cost Basis, and Why Does It Matter? 

Your home’s cost basis is critical for determining your taxable gain. It’s not just your purchase price; it also includes qualifying expenses like major renovations, new additions, or energy-efficient upgrades. Keeping detailed records of these costs can significantly reduce your taxable profit. For example, if you added a new roof or remodeled the kitchen, these expenses can increase your cost basis and lower your capital gains.

What Else Should Sellers Know? 

One common misconception is that you need to reinvest your sale proceeds into another property to avoid taxes. This is no longer true for primary residences, though it still applies to investment properties through a 1031 exchange. Additionally, losses on the sale of a primary home are not deductible, so careful planning is essential to maximize your benefits. 

Have questions about selling? Contact me today for expert guidance and to make the process as smooth as possible!