Taxes on Profits

It depends on the scenario. If you’re selling the home you live in full-time or an investment or vacation property you’ve lived in for two or more years during the past five years, then you may be able to make use of the primary residence exclusion, which is $250,000 for single filers or $500,000 for joint filers. If your profit is less than the exclusion, then no – you wouldn’t have to pay capital gains taxes on the profit.

Houses are typically categorized as investments, meaning any profits from sales are taxed at the capital gains tax rate, which is lower than your income tax rate.

Everyone is subject to two potential capital gains tax rates; a short-term rate for investments owned for less than a year prior to selling and a long-term capital gains tax rate for investments owned for more than a year prior to selling. The short-term rate is always the higher of the two.

You can visit the IRS website for the latest capital gains tax rates and rules for more information. As of 2024, the two long-term capital gains tax rates are 15 percent and 20 percent. Only high-income individuals must pay the higher 20 percent rate. The cutoff is:

• Single filers with taxable income over $492,300
• Married people filing separately with taxable income over $276,900
• Married people filing jointly with taxable income over $553,850
• Head of household filers with taxable income over $523,050

To put it simply:

• Most people selling their primary residence (if they meet the residency requirement) will not owe taxes if the profit is below the exclusion threshold ($250,000 for single filers or $500,000 for joint filers)
• You will owe capital gains taxes on any profits above the primary residence exclusion threshold
• Most people who do owe capital gains taxes will be taxed at the 15 percent rate on profits above the exclusion amount
• The exception is filers above the income limits or those who made a profit on a “short-term” sale 

Although these generalizations apply to most people, there are dozens of other situation-specific state and federal tax laws that may apply. For example, a different set of rules applies if you’re selling a property you received as a gift or a property that was bequeathed to you by someone who passed away.

Home improvement investments can also have tax implications since you can add the cost of improvements to the property’s cost basis. This means things like replacing a roof, renovating a kitchen or adding an extension to the property may be used to offset profit and keep you below the exclusion limit. Home modifications that qualify as routine maintenance or repairs typically don’t count.

An example might be:

• You bought a house for $400,000
• You spent $50,000 redoing the kitchen
• The cost basis is now $450,000
• If you’re a single filer and you sell the house for $700,000, you can exclude all the profit since the cost basis is now $450,000 instead of the $400,000 you paid for the house initially

There are also some people, like real estate dealers and professional real estate flippers, who may need to claim their profit as regular income instead of capital gains profits. If selling homes is your primary business activity, it might not be considered a traditional investment as defined by the IRS – but this typically isn’t an issue for the average home seller.

Should You Talk With an Accountant?

This is a personal decision that often depends on your comfort level with tax filings. If you’re normally a DIY filer who takes the standard deduction, you might want to work with a professional tax preparer the year you plan to use the exclusion.

Audits and other problems can arise if it’s not clear to the IRS that you meet the qualifications to utilize the exclusion you claim. Working with an accountant or professional tax preparer can help ensure that you not only qualify for the exclusion but also have the necessary paperwork to prove it to the IRS.

High-income individuals or those who are claiming capital gains exclusions after a complicated real estate transaction may also benefit from professional tax preparation.

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