Fonville Morisey Realty/Chapel Hill Sales Office

Selling Your Home: How It Affects Your Taxes

by Mitzi Powell 01/01/2020

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

Mitzi Powell

TRUSTED REAL ESTATE SPECIALIST
Mitzi Powell is a native of North Carolina and a graduate of UNC-Chapel Hill. Her ties to the University are still strong, and she is an avid Tar Heel fan. Mitzi grew up in the Goldsboro area and currently resides in Chapel Hill. A Triangle resident for most of her life, she knows the area thoroughly. Before obtaining her real estate license, Mitzi was a Public Information Officer for the North Carolina Department of Transportation. The skills she developed in this position forming and maintaining associations has enabled her to create lasting relationships with clients and customers in the real estate industry. Clients always have confidence in Mitzi and know that she will go above and beyond for them.

In her time as a broker, Mitzi has earned a reputation for being committed to the best interests of her clients. As part of the Fonville Morisey team, Mitzi has enormous resources at her disposal. Fonville Morisey provides all of the services a home buyer or seller requires. FM Lending, Fonville Morisey’s in-house mortgage company, makes financing your home readily available. FM also has an in-house title company, Guaranty Title, which backs FM listings through an exclusive in-house warranty program that covers sellers from the date of listing at no cost. Trust Mitzi and Fonville Morisey with your real estate needs and see why so many others have counted on them.