Ask an Advisor: I'm Selling My Home for $750K - How Much Will I Owe in Capital Gains Taxes?
When selling a home, understanding the tax implications is crucial, especially if you expect to make a significant profit. If you’re selling your home for $750,000, you might be wondering how much you’ll owe in capital gains taxes. The answer depends on various factors, including your cost basis, how long you’ve owned the property, and your current tax bracket. Ask an Advisor I’m Selling My Home for $750K – How Much Will I Owe in Capital Gains Taxes?
What is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit (or gain) made from selling an asset, like a home. The gain is calculated by subtracting the original purchase price (plus any improvements) from the sale price. If you’ve owned and lived in the home for at least two out of the last five years, you may be eligible for a significant tax exclusion.
The Home Sale Tax Exclusion
One of the key benefits available to homeowners is the home sale tax exclusion. Under the IRS rules, if you are single, you can exclude up to $250,000 of profit from the sale of your home from capital gains tax. If you are married and filing jointly, this exclusion doubles to $500,000. This means that if your profit is below these thresholds, you won’t owe any capital gains taxes.
For example, if you bought your home for $500,000 and are selling it for $750,000, your gain is $250,000. If you’re single, you wouldn’t owe any capital gains tax on this sale because your profit falls within the $250,000 exclusion limit. If you’re married, you would still be well within the $500,000 exclusion limit.
Calculating Capital Gains Tax on Higher Profits
If your profit exceeds the exclusion limits, you will owe capital gains tax on the amount above the exclusion. The capital gains tax rate depends on your income and how long you’ve owned the home. For most people, long-term capital gains (assets held for more than a year) are taxed at 15%, but they can be as low as 0% or as high as 20%, depending on your tax bracket.
Continuing with the example, let’s say you bought your home for $250,000 and are selling it for $750,000, resulting in a $500,000 gain. If you’re single, $250,000 of this gain would be subject to capital gains tax because only the first $250,000 is excluded. If you’re married and qualify for the $500,000 exclusion, you wouldn’t owe any capital gains tax.
Other Considerations
- Improvements: If you’ve made substantial improvements to your home, such as a new roof, kitchen remodel, or addition, you can add the cost of these improvements to your original purchase price (cost basis). This reduces your capital gain and potentially the amount of tax you owe.
- Primary Residence Requirements: To qualify for the exclusion, you must have owned and lived in the home as your primary residence for at least two of the last five years before the sale. If you don’t meet this requirement, you may still be eligible for a partial exclusion in certain circumstances, such as a job change, health issues, or other unforeseen events.
- State Taxes: Don’t forget that state taxes may also apply. Some states have their own capital gains tax rates, which could increase the total tax you owe.
Conclusion
Selling your home for $750,000 could lead to a significant profit, but thanks to the home sale tax exclusion, many homeowners won’t owe capital gains tax on their sale. Understanding your cost basis, the exclusion limits, and your tax bracket is essential for calculating any potential taxes. If your profit exceeds the exclusion limit, you’ll owe capital gains tax on the excess amount. Consulting with a tax advisor can help you navigate these complexities and ensure you’re taking advantage of all available deductions and exclusions.
