How Selling Your Home Affects Your Taxes

March 9, 2022 |

Did you sell your home in 2021? If so, you are not alone. Millions of Americans participated in one of the hottest residential real estate markets in history. However, are you aware that there could be tax implications of receiving top dollar for your home? To avoid any surprises this tax filing season, let’s look at the tax treatment for the sale of your personal residence.

For married filing jointly taxpayers, there is a gain exclusion of up to $500,000 on the sale of a principal residence. For single filers, the gain exclusion is up to $250,000. To claim the exclusion, you must have owned and lived in the home as your main residence for at least two years out of the prior five years. The two years do not have to be subsequent. You may only qualify for this gain exclusion once every two years. However, there may be an exception to the two-year rule if the sale of your home was for a job-related move and meets certain requirements.

How is the gain calculated? The gain on the sale of your home is calculated as the selling price less the basis in the property. The basis of your home includes the initial purchase price, plus closing costs, plus home improvements. Using an example, the purchase price of the home was $195,000, closing costs were $5,000, and the owner made improvements of $100,000. The basis in this home is $300,000.

In the above example, a married couple could sell the property for $800,000 before any gain would be recognized. For illustration purposes, let’s assume a married couple sold the property for $850,000. They would recognize a $50,000 capital gain on their 2021 individual income tax return. While gains more than the exclusion amounts are taxable, it is important to note that if a loss is incurred on the sale of a personal residence, the loss is nondeductible.

If you used part of your home for business, such as for a home office, or rented part of your home and claimed depreciation in prior years, your exclusion and gain calculation may have additional complexities.

If you sold your home in 2021 or plan to sell your home in 2022, please contact your trusted Simon Lever advisor to determine if there will be any impact to your income tax returns.