The Tax Guide for Buying or Selling a Home
Updated: Jan 20
You can deduct home mortgage interest on the first $750,000 of indebtedness. (If your house is more than that amount, you can take a percentage of the average balance as a deduction.) However, this is an itemized deduction, and because the Tax Cut and Jobs Act of 2017 effectively doubled the standard deduction, 88.5% of taxpayers pay less tax by using the standard deduction and do not itemize.
Bottom line- there is no significant tax consequence of buying a home unless you live in a high tax state, large medical bills, or something else that we can itemize.
Capital gains is a tax on the profit of the investment in real estate.
Above, I underline profit to highlight that you take the house's selling price and subtract both the purchase price AND any improvements you've made. For example, if you purchased your home for $200,000 and put a new roof on it for $30,000 before selling it for $385,000, your profit would be $155,000. In tax code speak, you take the selling price ($385,000) less your tax basis ($230,000) to find the gain.
Selling a house that you have lived in for two years in the past five years.
Thanks to the Tax Relief Act of 1997, most homeowners are exempt from capital gains on the sale of their house. If you are single, you will pay no capital gains tax on the first $250,000 in profit (excess over cost basis). Married couples enjoy a $500,000 exemption on the gain. The keys to the exemption are as follows:
· You did not acquire the property through a Like-Kind Exchange (1031 exchange)
· You owned the home for at least 24 months of the last five years leading up to the date of the closing.
· You used the home as your primary residence for at least 24 months of the last five years. The residency does not have to be a continuous block of time, just 730 days.
· You did not claim this exclusion from the sale of another home within the last two years.
If you meet those, you can exclude up to $500,000 of the profit!
Selling a house that you HAVE NOT lived in for two years of the past five.
As you probably do not meet the exemption (there are exceptional cases, see below!), if you've held the property for over a year, you are entitled to a "Long-Term Capital Gains" rate. The long-term capital gains tax rate is 0%, 15%, or 20%, depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates. Below is the capital gains tax table for 2021 with the rate on the far left and the filing status and income ("Adjust gross income") brackets.
Married, filing jointly
Married, filing separately
Head of household
$0 to $40,400
$0 to $80,800
$0 to $40,400
$0 to $54,100
$40,401 to $445,850
$80,801 to $501,600
$40,401 to $250,800
$54,101 to $473,750
$445,851 or more
$501,601 or more
$250,801 or more
$473,751 or more
For the previous example of a $155,000 gain, if you were filing jointly and made $100,000 on your W-2's, you would most likely owe 15% of that gain ($23,250). If you were single and earned $500,000 in taxable income, you would have to pay 20% of the profit ($31,000).
If you do not meet the exemption listed above because of longevity, a few exceptions may allow a partial exemption. If you had to move due to Work, Health, or an unforeseeable event, you might be eligible. This portion of IRS Publication 523 is well written and can help you decide if you qualify.
Do you have a GOOD accountant?
Not all accountants are created equal. Let us show you the difference a pro-active, engaging accountant can make in your finances. Call us today at (603)420-9303!