At a Glance
When selling a home, it is essential to consider the taxes you might have to pay as part of your move. Selling a home could result in a capital gain taxable on your federal and state income tax returns.
You may qualify for an exclusion if you meet specific criteria. Familiarize yourself with the principal residence exclusion and other considerations that may allow you to reduce your tax liability from the sale of a home.
Typical Tax Liability for a Home Sale
The IRS has general rules for taxes on the sale of a house. If you owned a home and lived in it for two of the five years before the sale, you generally do not have to report a profit under $250,000 when filing a single return. If you are married and file jointly, this increases to $500,000.
If your profits on a home sale exceed these thresholds, you must report them as capital gains. Capital gains are the profits you receive from the sale of a property or investment. Capital gains are taxed at special rates for federal income tax purposes. The capital gain tax rates are 0%, 15%, and 20%, depending on your income bracket.
In 2021, the 15% capital gains tax applies to people with taxable income between:
- $40,400 and $445,850 filing single
- $80,800 and $501,600 married filing jointly
- $54,100 and $473,750 head of household
- $40,400 and $250,800 married filing separately
If you alone, or you and your spouse combined, earn more than these thresholds, you may be subject to a 20% capital gains tax. The tax rate is 0% when income is under these thresholds.
Differences in Capital Gains Per State
You may have to pay income tax to the state government in addition to the federal capital gain tax. Many states, like California, do not have separate tax rates for capital gain income. In California, the capital gain is taxed at ordinary rates ranging from 1% to 13.3%, depending on your taxable income bracket. Some states, such as Texas and Nevada, do not have an income tax and do not tax capital gain income.
Tax Considerations When Selling a Home
You may be eligible for exclusions from taxes when selling a house. The primary option is through the principal residence exclusion. Additional tax considerations when selling a home include whether you own more than one residence, how to report the income, and in some cases, how you came to own the home.
Principal Residence Exclusion
The principal residence exclusion is a tax advantage allowed by the IRS. Under this exclusion, people who meet specific criteria can exclude gains from the sale of their principal residence.
- Ownership test: You must own your home for two out of the five years prior to the date of sale.
- Use test: The home must have been used as your primary residence for at least two of the five years before the date of sale.
The principal residence exclusion only applies to gains up to $250,000, or $500,000 for taxpayers who are married and filing jointly. Additionally, you are only eligible to claim this exclusion once every two years.
If you don’t meet the ownership and use tests, you may be able to claim a partial primary residence exclusion. This would apply if you had to sell your home because of an unforeseeable event such as a career or business relocation.
If you plan to move from California, establishing residency in another state may affect the taxes you pay when selling your home in California. The tasks of trying to establish residency in another state and navigating California’s complex income tax laws on your own can be challenging. Consulting with a tax planning firm like Windes can help you find the right strategy to minimize your tax liability when selling a property.
More Than One Residence
If you own more than one home, a second home can qualify for the exclusion as long as it meets the ownership and use tests.
Reporting The Income
Generally, if you can exclude your entire gain on the sale of your home, you do not have to report it on your tax return. If you are issued a Form 1099-S, then you must report the sale and the allowable exclusion on your income tax return. It’s best to consult with a tax professional to ensure you report the correct data.
If you do a short sale on your home for less than your remaining mortgage, you may be able to exclude the discharged amount. This applies only if the amount was discharged before January 1, 2026, or if you have a written agreement for debt forgiveness before the same date.
Partner With Windes When Preparing to Sell a House
When selling your home, working with a tax preparation firm can help you minimize your tax liability and develop a selling strategy that benefits your finances. Windes offers tax planning services for individuals and businesses in Orange and Los Angeles Counties and throughout California.
Our accountants can help you manage financial changes, such as selling a property to reduce adverse tax consequences. We can also help you take advantage of exclusions and deductions that apply to your situation.
Contact Windes today at 844.494.6337 or firstname.lastname@example.org to learn how our individual tax return preparation and planning services can benefit you.