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Selling a Home: Tax Considerations

by Rebecca Larson Realtor | Real Estate Agent St.Petersburg FL 09/20/2020

Photo by Acharaporn Kamornboonyarush from Pexels

In a nutshell, if you have owned a home for five years and lived in it for at least two out of five years, or if you’ve owned the house for two years and lived in it the entire time, a single person has a $250,000 tax exemption. If you are married, as a couple, you have a $500,000 exemption. Any gains over those amounts are taxable. You should always discuss the sale of your home with a tax attorney, especially if you used the house for business or rented it out, as you may not be able to take the exemption on homes used for business or as a rental.

Figuring the Tax

Before you can estimate how much tax you might owe, you need to calculate the cost basis for the property. Figure the tax by completing these steps:

Figure the Cost Basis

Add the price you paid for the property to the cost of any significant improvements. Subtract any casualty and theft losses, closing costs you paid when you bought the house and allowable depreciation. You might be able to subtract some closing costs. If you inherited the property, the initial investment is the fair market value on the date of the death of the person who willed the house to you.

For gifted properties, if there is a gain, you use the donor’s adjusted basis in the cost basis equation. If there is a loss, the cost basis is the fair market value on the date you received the property as a gift or the donor’s adjusted basis, whichever is less.

Figure the Capital Gain

Once you have the cost basis, subtract it from the sale price of the house. For example, if you paid $500,000 for your home and you are now selling it for $1,000,000, you have a capital gain of $500,000. If you are single, you will pay tax on $250,000. If you are married, the exclusion is $500,000, which wipes out the $500,000 profit.

Reducing the Tax Owed

You may be able to use the Section 1031 exchange if you are selling a home used for business or that was rented out as long as you buy another house for business or to rent out. The new purchase cannot be for personal use and the exchange must be for “like-kind.”

The regulations for a Section 1031 exchange are limited and may be confusing. Always retain a tax lawyer or accountant to help you with your taxes, especially if you are buying and selling an investment property. If you are selling a million dollar plus home and you use it as your personal residence, you should still contact a tax lawyer. Depending on your finances, the tax lawyer may be able to help you avoid some of the tax.

About the Author
Author

Rebecca Larson Realtor | Real Estate Agent St.Petersburg FL

SELLING THE BURG!! Rebecca Larson is a client-focused sales professional whose clients regard her as their trusted real estate advisor. She knows the neighborhoods and communities of Pinellas County and is passionate about what she does. With over 18 yrs of experience in the real estate industry, Rebecca is equipped with the knowledge in sales, negotiating contracts, preparing your home for sale and of course proper pricing of your home for today's market. She has established a large client base with lots of testimonials from her loyal clientele. Rebecca's real estate background serves her well and her clients appreciate her dedication and skills to get them to the "home that fits best for them."