Before we talk about taxes, we need to issue a disclaimer: we are not tax professionals, and before you make any decisions about buying or selling real estate, you ought to talk to your tax professional.
Now that we’ve got that out of the way, let’s talk taxes! Even if you make a profit by selling you home, you may not have to pay any income taxes on the transaction. This is in fact the greatest single tax “loophole” which exists for the American middle class.
When you sell any other asset for a gain, you need to pay capital gains tax – but that is often not the case for the sale of your primary residence. To make sure you don’t owe taxes on the sale, you must first calculate profit you’ve netted from the sale.
First, add the cost of capital improvements you’ve made to the purchase price. Next, add together all the expenses you’ve incurred to sell your home (commissions, staging, cleaning, etc) and subtract this figure from the sale price. If you’ve made less than $500,000 in profit (for married individuals) or $250,000 in profit (for single individuals), you should not owe any income taxes on the gain.
In order to avoid paying taxes on the profit of your home sale, you must also meet the following conditions: – You must have owned your home for at least 2 years – The home must be your primary residence for 2 of the past 5 years – You cannot have excluded profit from the sale of another house within the past 2 years.