Sale OF Real Estate – Personal Residence  – Do I owe Tax?  WHOA this is a big topic.

Oftentimes when we are speaking with potential sellers, they are unaware that there may be tax owed upon the sale of their home.  First let me say I am a Real Estate Professional, NOT a tax advisor; you should consult your tax professional and/or attorney for ANY tax question.  The partial information here might just be enough for you to answer some of your questions. 

IRS Publication 523 relates to Selling Your Home.  This is different from selling a rental property or an exchange.  Here is a partial eligibility test for a personal residence–

-You didn’t acquire the property thru a like-kind exchange in the past 5 years
-You are not subject to Expatriate Tax.
-You owned the home for 2 of the last 5 years and lived there for at least 2 (1 if you became disabled) of the 5 leading up to the sale.

Gain on Sale - Once you are sure the home qualifies as your personal residence, then you move on to whether you have capital gains tax to pay upon the sale.  A single person may qualify for a one time exclusion on their gain (profit) of $250,000, $500,000 if married filing jointly.  That portion could be tax free.  But what about the amount over that?   

Example:  you bought your home for $500,000.  Today you are selling for $1,000,000.  Well as a single person you would exclude $250,000 and possibly owe tax on the $250,000 over the $500,000 you paid; a married couple could meet the $500,000 exclusion and be on your merry way with no tax owed.  But what IF…you are selling for $1,500,000?  You still meet the $500,000 exclusion if married and you both meet the resident requirements…what happens to the other $500,000 (or $750,000 as a single person)?  It would/could be considered taxable capital gain.  

IF you made some improvements, here are some examples of things you did to your home that could reduce the capital gain tax (Page 10 of the IRS Publication 523).  Certain updates and room additions, deck, garage, patio, ADU, retaining wall, pool, new roof, windows, doors, siding, heating & A/C system, duct work, A/C, built in appliances, updated kitchen/baths, flooring, carpeting, and fireplace.  

Perhaps I should have said this first.  Many of us want to live in our homes forever, even if our spouse is no longer with us.  (We potentially as a single person are able to exclude $250,000 from capital gains.  A HUGE reduction from the $500,000 we had as a married couple.)  One of the heartbreaking things for me is that many may not know the exception that allows a surviving spouse to keep that $500,000 IF you sell your home within 2 years of the death of your spouse!  If you are the “live in the home forever person” and you intend for your heirs to inherit it, it may not matter; but if 2 years and 2 months later you decide to move nearer children or downsize you have just given up a potential $250,000 exclusion on the gain on the sale of your property because you were unaware of the timeframe.  Hard stuff to talk or think about when you are grieving, but important to note for your financial future.