Selling your home means a lot of exciting changes, but it can impact one thing you may not consider: Your 2019 taxes. When you sell a home, you typically receive a one-time influx of money that, depending on your tax status and the home price, may greatly impact how much you owe on your taxes. But will selling your home this year have an impact on your 2019 taxes? The answer can be a little complicated.
Capital Gains Tax
When you sell your home, the profits you receive from the sale may be considered as income under the capital gains tax. This additional income can push some people into the next tax bracket, meaning they end up owing way more money than anticipated.
WHAT IS THE CAPITAL GAINS TAX?
The capital gains tax is a tax that’s levied when you sell a major asset. It is only calculated based on the profits you make, so it takes into account the original purchase price and how much you sold it for.
Up until 1997, you had the option for a one-time capital gains tax waiver of up to $125,000 if you were at least 55 years old and sold your primary residence.
However, the new rule excludes up to $250,000 on the sales price of your primary residence for a single person or up to $500,000 for a married couple.
That means, if you meet certain criteria, selling your home means you won’t see any impact on your 2019 taxes.
QUALIFYING FOR THE CAPITAL GAINS TAX EXEMPTION
In order to qualify for an exemption under the capital gains tax, your home’s sale must meet certain criteria.
Here are the 3 criteria you must meet, according to the IRS:
Have owned the home for at least two years
Have lived in the home as your primary residence for at least two years
Have not excluded gain from the sale of another home in the two-year period ending on the date of the sale of the home you’re wanting to exclude on your 2019 taxes
If you have rented your home for part of the year during the last two years, you may only be able to exclude a portion of your gain from the home’s sale in proportion with the amount of time in the year you lived in the home.
HOW ARE GAINS AND LOSSES CALCULATED?
Calculating how much you’ve gained on the sale of your home takes a few factors into consideration: how much you originally paid, how much you sold it for, and the value of any qualifying home improvements you made.
Qualifying home improvements include additions and renovations to bedrooms, kitchens, bathrooms, and other rooms, in addition to replacements of items such as your roof and siding. Home security systems, lawn sprinklers, and HVAC system upgrades also qualify.
However, if you make repairs or upgrades necessary to keep your home in good repair, you cannot count them as qualifying home improvements.
Upgrades made but later replaced, such as flooring, as well as upgrades that have an installed life expectancy of less than a year do not qualify.
When figuring out your capital gains, you begin by taking the initial purchase price of your home and add on the cost of any qualifying home improvements.
So, if you originally purchased your home for $200,000 and spent $50,000 in improvements, your cost basis is $250,000.
Then, take the sales price and subtract any commissions paid to the real estate agent. Take that number and subtract your cost basis to get your capital gains.
If your home sold for $300,000 and you paid a commission of $3,000, your sale price for this calculation is considered $297,000. Then subtract your cost basis of $250,000 to get capital gains of $47,000.
In this example, capital gains wouldn’t impact your 2019 taxes because the number is less than $250,000 for an individual or $500,000 for a couple.