Selling my house for $750,000 – How much will I owe in capital gains taxes?

I am selling my home and the price is $504,999. After I pay off this house, I’ll have $400,000. Do I have to pay capital gains tax because I plan to pay my retirement home with the money I got?

– Thomas

The answer is firmly “it depends,” both in terms of whether you’ll have to pay capital gains tax and how much you might have to pay. Let’s talk about the rules in this situation first, then we can get into some examples to see how it works.

Is the sale of your home taxable?

The IRS allows single filers to exclude up to $250,000 of capital gains from the sale of their home, and married couples filing jointly to exclude up to $500,000 if they meet certain criteria.

To qualify for any of these exclusions, all of the following must be true:

1. You must have owned the home for at least two of the five years immediately preceding the sale.

2. You must have used the home as your primary residence for at least two of the five years immediately preceding the sale.

3. You cannot have claimed the exclusion in the two years immediately preceding the sale.

If you meet all these criteria, you can apply for exclusion. If any of these criteria are not true for you, you will have to pay capital gains taxes on all income.

Let’s look at some examples. A financial advisor can also guide you through the details in your specific situation. Partner with a fiduciary financial advisor for free.

Example 1: Meets the exclusion criteria, married filing jointly

Let’s say you’re selling the home you’ve owned and lived in for the past few years, and you’re married and filing taxes together.

In this case, you would qualify for a $500,000 exclusion when you sell your home. Because you offset $400,000, which is less than the exclusion, you shouldn’t pay any capital gains tax on that income.

Example 2: Meets the exclusion criteria, alone

Assume the same situation as above, except in this scenario you are single instead of married filing jointly. In this case, you would qualify for an exclusion, but it would only be $250,000. With $400,000 in income, that means $150,000 would be subject to capital gains tax. The question is then at what rate these incomes would be taxed. You can click here for a full breakdown of capital gains tax rates, but let’s assume you fall into the 15% bracket.

Multiplying $150,000 by 15%, you should pay $22,500 in taxes, leaving you with total net income of $377,500. Of course, you may also be subject to state income tax, which would increase the amount you have to pay.

The story continues

A financial advisor can help you do the math for your situation. Connect with an advisor today.

Example 3: Does not meet exclusion criteria

If you do not meet the exclusion criteria, then the entire $400,000 will be taxed as a capital gain. In this case, the first big question is whether these gains are taxed as short-term or long-term capital gains.

If you’ve owned the home for a year or less, your earnings will be taxed as short-term capital gains, meaning they’ll be subject to the same tax rates as ordinary income.

Let’s say you’re married filing jointly and you and your spouse have $100,000 in income other than the sale of the home. The $400,000 in receipts would push the total ordinary income to $500,000 and into the 35% tax bracket, but because of our progressive tax code not all of that money would be taxed at the 35% rate.

Again, you can click here for a full breakdown of the 2023 tax brackets, but here’s how they would apply to your $400,000 in take home in this case:

• $90,750 would be taxed at 22% = $19,965 in taxes

• $173,450 would be taxed at 24% = $41,628 in taxes

• $98,300 would be taxed at 32% = $31,456 in taxes

• $37,500 would be taxed at 35% = $13,125 in taxes

That’s a total charge of $106,174 just for selling your home, leaving you with net proceeds of $293,826. Although, again, there may be state income taxes on top of that.

If you’ve owned your home for a year or more, you’ll only have to pay the lower long-term capital gains rate. Using the same example as above, with $100,000 of taxable income other than the sale of your home, the entire $400,000 would be subject to a 15% capital gains tax. That’s a tax cost of $60,000, on the net proceeds from the sale of your home of $340,000.

There are exceptions

There are exceptions to the general rules outlined above. You can click here for an overview of these exceptions and click here for details on all of these rules.

But it mostly depends on whether you’ve owned and lived in the home for at least two of the last five years. If so, you will qualify for a significant exclusion. If not, you will have to pay capital gains tax on the entire amount. Consider talking to a fiduciary financial advisor if you have more questions.

Conclusion

Calculating the capital gains tax that may be due on the sale of a home depends on several factors. One is if you meet the exclusion criteria of $250,000 for single filers and $500,000 for couples filing jointly. A second factor is how long you’ve lived in the home and whether it was your primary residence. Additionally, you must not have claimed the exclusion in the two years prior to selling the home. Note, however, that there are exceptions

Tax advice

• If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have free introductory calls with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.

• Our free capital gains calculator, both short-term and long-term, can be used for gains from the sale of a wide range of assets, not just a residence.

• Check out our no-cost property tax calculator to get a quick estimate of what you’ll owe based on your property’s location and assessed value.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Matt Becker, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAsset AMP platform nor is he an employee of SmartAsset and has been compensated for this article.

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