I am selling my house and the price is $504,999. After I pay off this house, I will receive $400,000. Do I have to pay capital gains tax because I plan to pay off my retirement home with the money I have offset?
– Tomas
The answer is clear: “It depends”, both in terms of whether you have to pay capital gains tax and how much you may have to pay. Let's first talk about the rules for this situation, and then we can look at some examples to see how they work.
Is the sale of your house taxable?
The IRS allows individual filers to exclude up to $250,000 in capital gains from the sale of their home, and married couples filing jointly to exclude up to $500,000, if they meet certain criteria.
To qualify for both of those exclusionsall of the following must be true:
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You must have owned the home for at least two of the five years immediately preceding the sale.
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You must have used the home as your principal residence for at least two of the five years immediately prior to the sale.
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You cannot have claimed the exclusion in the two years immediately preceding the sale.
If you meet all these criteria, you can claim the exclusion. If one of these criteria does not apply to you, you will have to pay capital gains tax on all proceeds.
Let's look at some examples.
Example 1: Meets the exclusion criteria, married filing a joint tax return
Suppose you sell the house that you have lived in for the past few years and that you are married and that you file a tax return jointly.
In that case, you are eligible for a $500,000 exclusion on the sale of your home. Since you receive $400,000 net, which is less than the exclusion, you don't have to pay capital gains taxes on those proceeds.
Example 2: Meets exclusion criteria, single
Let's assume the same situation as above, except in this scenario you are single and not filing jointly. In that case, you are eligible for an exclusion, but it is only $250,000. With proceeds of $400,000, this means $150,000 would be subject to capital gains taxes. The question then is at what rate these proceeds are taxed. You can Click here for a complete overview of capital gains tax ratesbut let's assume you fall into the 15% bracket.
If you multiply $150,000 by 15%, you would pay $22,500 in taxes, leaving you with a total net proceeds of $377,500. Of course, you may also have to pay income tax, which increases the amount you have to pay.
Example 3: Does not meet the exclusion criteria
If you don't meet the exclusion criteria, the entire $400,000 will be taxed as capital gains. In that case, the first big question is whether those profits will be taxed short or long term capital gains.
If you own the home for one year or less, your proceeds are taxed as short-term capital gains, meaning they are subject to the same tax rates as ordinary income.
Let's say you're married and filing jointly and you and your spouse have $100,000 in income from the sale of your home. The $400,000 in proceeds would bring your total ordinary income to $500,000 and put you in the 35% tax bracket, but because of our progressive tax laws, not all of that money would be taxed at the 35% rate.
Again, that's possible Click here for a complete overview of the 2023 tax bracketsbut this applies to your $400,000 home proceeds in this case:
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$90,750 would be taxed at 22% = $19,965 in taxes
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$173,450 would be taxed at 24% = $41,628 in taxes
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$98,300 would be taxed at 32% = $31,456 in taxes
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$37,500 would be taxed at 35% = $13,125 in taxes
That's a total tax bill of $106,174 on just the sale of your home, leaving you with a net proceeds of $293,826. Although state income taxes may also be added.
If you have owned your home for a year or more, you only have to pay the lower long-term capital gain. Use the same example as above, with $100,000 in it taxable income excluding the sale of your home, the entire $400,000 would be subject to a 15% capital gains tax. That's a tax expense of $60,000, for a net proceeds on the sale of your home of $340,000.
There are exceptions
There are exceptions to the general rules set out above. You can click here for an overview of those exceptions, and that is possible click here for more information about all these rules.
But for the most part, it comes down to whether you've owned and lived in the home for at least two of the last five years. Then you qualify for a significant exclusion. If this is not the case, you will have to pay capital gains tax on the entire amount.
In short
Calculating the capital gains tax that may be due on the sale of a home depends on several factors. One is whether you meet the exclusion criteria of $250,000 for single filers and $500,000 for couples filing jointly. A second factor is how long you have lived in the home and whether it is your primary residence. In addition, you may not have claimed the exclusion in the two years prior to the home sale. However, keep in mind that there are exceptions
Tips about taxes
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If you don't already have a financial advisor, finding one doesn't have to be difficult. SmartAsset's free tool connects you with up to three vetted financial advisors serving your area, and you can have free introductory calls with your advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.
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Our free capital gains calculatorboth short and long term, can be used for profits from the sale of a wide range of assets, not just a home.
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Check out our free property tax calculator to get a quick estimate of what you owe based on the property's location and its appraised value.
Matt Becker, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
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