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Do You Pay Taxes When You Sell a House?

Taxes When You Sell a House

Selling the house you’ve fondly called home is a significant life event. Whether you are in the process of relocating to another state, moving out of your starter home, going through a divorce, or downsizing to a smaller unit, it is important that you understand the home selling process, especially when it comes to the taxes involved.

Do you pay taxes when you sell a house in Phoenix?

Selling your house is a significant milestone, but it can also introduce a new set of questions, particularly around Taxes When You Sell a House. Understanding the tax implications is crucial to avoid any financial surprises. Whether you’re upgrading to a larger home, downsizing for retirement, or relocating for a job, knowing what taxes you might owe—and how to potentially minimize them—can make a big difference. Let’s explore the essential information you need to be prepared when selling your house.

Do You Pay Taxes When You Sell a House? 2021 Guide
Photo credit: Image by Steve Buissinne from Pixabay

Do You Pay Taxes When You Sell a House in Phoenix: Understanding Tax Implications

After selling your house, you might be wondering if you have to pay taxes when you sell a house on the profit you earned from the sale. The answer depends on two main factors: the amount of profit you gained and how long you owned and lived in the house before the sale. 

  • If you owned and lived in the house for two of the five years before the sale date, then up to $250,000 of any profit you made is tax-free.
  • If you are legally married and you and your spouse both filed a joint tax return, the tax-free amount doubles to $500,00. Remember that this is based on the profit you gained from selling your house and not on the total income.
  • If you lived in the house for two of the five years leading up to the sale and you sold it for less than $250,000 over your buying price, you don’t need to pay any taxes.

How do I qualify for this home selling tax break?

There are three requirements you need to meet to qualify for a tax break:

  1. The home you are selling must be your primary residence for at least two of the previous five years before the sale date. If you have secondary homes such as rental units, vacation homes, or investment properties, do not expect them to be eligible for a tax break.
  2. You must have owned the home you are selling for at least two years or 24 months within the five years before the sale date. It doesn’t necessarily need to be continuous, nor does it have to be the two years leading up to the sale. As long as you have ownership of the house for at least two years, you are eligible for the tax break.
  3. You must not have claimed this tax break on another home you are trying to sell within the past two years. If you are selling several of your properties, you can only apply the tax break to one of your properties.

If you satisfy these three basic requirements, you are then eligible for the tax break. However, if you failed to meet all of them, there are still special circumstances that may enable you to claim either a partial or complete exclusion.

Taxes when you sell a house: Special Circumstances for Tax Breaks

Even if you don’t meet the standard requirements, you might still qualify for a partial tax break under certain conditions. These special circumstances include:

  • Change in Employment: If you had to sell your home because of a job change that required you to move at least 50 miles farther from your previous home, you might qualify for a partial exclusion.
  • Health Reasons: If you sold your home due to health reasons, such as needing to move to a facility for medical care or to be closer to a family member who requires care, you might be eligible for a partial exclusion.
  • Unforeseen Circumstances: Events that you could not have anticipated, such as natural disasters, death, divorce, or multiple births from the same pregnancy, might also qualify you for a partial exclusion.

Taxes when you sell a house: Calculating Your Home Sale Profit

To determine whether you owe taxes on your home sale, you need to calculate your profit. Here’s how you can do it:

  1. Determine Your Selling Price: This is the amount you sold your home for.
  2. Subtract Selling Expenses: Deduct costs such as real estate agent commissions, advertising fees, legal fees, and any other expenses directly related to the sale.
  3. Calculate Your Adjusted Basis: This is the original purchase price of your home, plus the cost of any improvements you made, minus any depreciation you claimed for tax purposes.
  4. Subtract Your Adjusted Basis from the Selling Price: The result is your profit from the sale.

If your profit exceeds the tax-free amount ($250,000 for single filers or $500,000 for married couples filing jointly), you will need to report the excess as a capital gain on your tax return.

Reporting the Sale on Your Tax Return

If you do have to report the sale of your home, you’ll need to fill out IRS Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D, “Capital Gains and Losses.” These forms will help you calculate your capital gain or loss and determine how much tax you owe.

Seeking Professional Advice

Navigating the tax implications of selling your home can be complex, and it’s important to get it right to avoid any legal issues. Consider consulting with a tax professional or real estate attorney who can provide personalized advice based on your specific situation. They can help you understand your eligibility for tax breaks, calculate your potential tax liability, and ensure that you comply with all relevant tax laws.

When selling your house, you must be fully aware of the tax implications involved so you can navigate them properly. To avoid any legal concerns, it is important that you do your research or talk to a professional to guide you through the process. 

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