Tax Season: What to Expect When Selling Your Home
Tax season is always on our mind when selling our home. You will surely want to know what income taxes you will have to pay on the sale.
The amount of taxes you will be responsible for depends on the length of time you have spent in the home. If your family resided in the home for 2 for the last 5 years, single homeowners can earn $250,000 tax-free! For couples filing jointly, that number grows to $500,000. If your home sale exceeds your allotment, you will have to pay capital gains tax on the amount that is above those tax-free amounts.
For homes owned less than one year, the regular tax applies.
Want to calculate your tax gain? Here is a suggestion:
Subtract all selling expenses, such as broker commissions, attorney fees and other closing costs (don’t forget the NJ Transfer Tax or Mansion Tax, click here to calculate), from the sale price. Then you need to calculate your “basis”. This is what you paid for your home PLUS some of the closing expenses from the purchase, such as title insurance and recording fees (but no pre-paid loan points or lender fees), and the costs of any permanent improvements, like a swimming pool or a new addition. See IRS Publication 523 for complete details and consult with your tax advisor!
Exceptions to the 2-year rule exist, however. For those disabled, relocating for work more than 50 mies away, or those needing to seek medical treatment for themselves or a relative, taxes on the profit can be pro-rated. It is tricky territory though, so always be sure to consult your tax advisor.