How Do Taxes Work If I Sell My House?

Ideally, if you’re buying a home, you intend to live there for at least several years, because if you don’t, the odds are better that you’ll end up losing money on the deal, between closing costs, taxes, and paying a real estate agent (if you use one to sell the home). You’re more likely to come out ahead on a home sale if you’ve owned it long enough for it to appreciate in value, as houses often do.

Per the IRS, you can qualify for the property tax exemption if you’ve lived in your home for at least two years out of the last five (and it was your primary residence).

• If you’re filing taxes as a single person, you can exempt up to $250,000 of the gain.
• If you’re filing jointly with your spouse, you can exempt up to the $500,000 of the gain.

In practice, this means that if you bought a home for $400,000 and sold it for $650,000, that $250,000 is the amount you’d be taxed on. But if you’ve lived in it at least two of the previous five years, you can exempt those taxes. If you sold the home for more (say, $700,000) and filed taxes as a single, you’d be taxed on $50,000 of that profit.

However, if you lived in the home for less than two years of the last five, you’d be charged the normal capital gains tax rate for your income level (0%, 15%, 20%). And if you sell the house at a loss, you can’t use that as a tax deduction, either.

Another challenge comes in when you’ve bought a home to use as an investment property (say, to rent out as a residence). In this case, you can write off a loss if you sell it, or any work you might do on it. At that point, things get complicated, and it’s worth working with a tax professional or Certified Financial Planner to ensure you’re paying the right amount and optimizing any exemptions or deductions you can take.