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Taxes when you sell, in plain terms

Most people who sell the house they live in owe no federal tax on the gain, up to a limit. Here is the shape of the rule, what basis means, and how inherited houses differ. The outline, without the advice.

01The exclusion, roughly

Under current federal rules, if the house was your main home for at least 2 of the 5 years before the sale, you can generally exclude up to $250,000 of gain from income, or up to $500,000 if you are married and file jointly. The two years do not need to be continuous. You can use the exclusion more than once in your life, but generally not more than once every two years.

Gain is not the sale price. It is the sale price minus your basis minus selling costs. For most people who have owned a house for a decade or less, the gain sits comfortably under the limit, and the sale does not add to their tax bill. For long-time owners in markets that have run up, it can exceed it, and the amount above the exclusion is taxed as a capital gain.

02Basis and improvements

Basis starts at what you paid for the house, including most closing costs. It goes up with capital improvements: a new roof, an addition, a replaced furnace, a finished basement. Repairs that keep the house in the same condition, like painting or fixing a leak, generally do not count. The higher your basis, the lower your gain, so receipts for the big projects are worth keeping for as long as you own the house.

Money taken out of the house along the way does not change the math. A home equity line or a home equity investment is paid off at closing from the sale price, but neither changes your basis or your gain. The payoff is just where some of the proceeds go.

03Inherited houses

A house you inherit generally gets a stepped-up basis: its value on the date the previous owner died, not what they paid for it decades ago. If you sell soon after at close to that value, there is often little or no gain to tax, even with a cash offer at a discount. The two-of-five-years residence test does not apply to the exclusion in the same way, because the gain itself is usually small. The rules differ for property held in certain trusts and in community property states.

04Where it gets more complicated

  • A rental or second home, where the exclusion generally does not apply and depreciation taken while renting comes back into the gain.
  • A house used partly for business, or rented for part of the ownership period.
  • Selling before two years because of a job change, health, or certain other events, where a partial exclusion may apply.
  • State taxes, which follow their own rules and may apply where federal tax does not.
  • A short sale or foreclosure, where forgiven mortgage debt can be treated as income in some years and not in others.

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Related

  1. Cash offer: the full guideWho cash buyers are, what they pay, how the process runs from the first call to the wire, what the speed costs you, and when a listing is the better move.
  2. Home equity investments and taxes, in plain termsThe cash you receive is generally not treated as income, and the settlement years later can change your gain when you sell. The outline, without the advice.
  3. HELOC interest and taxes, in plain termsInterest on a home equity line is deductible in some situations and not in others, and the difference is what you spend the money on. The outline, without the advice.

This path, in order

Cash offer: the full guide

  1. 01When a cash offer is the right call, and what it costs youA cash offer is fast and certain. You skip repairs and showings. You also net meaningfully less than a traditional sale.
  2. 02How cash offers are pricedEvery cash offer starts from what the house will be worth fixed up, then subtracts repairs, holding costs, selling costs and the buyer's margin. Here is the formula and why two offers on the same house differ by tens of thousands.
  3. 03Cash offer vs. listing: what you actually netA listing brings more, then gives some of it back in commissions, repairs, concessions and carrying costs. A cash offer brings less and gives almost nothing back. Here are the net numbers side by side.
  4. 04The cash offer timeline, from offer to fundedMost cash sales close in 7 to 21 days. Here is what happens in each stretch, how your mortgage and any second lien get paid, when you have to be out, and what can slow it down.
  5. 05Taxes when you sell, in plain termsYou are here
  6. 06Cash offer red flagsMost cash buyers are what they say they are. The ones who are not share a few habits: contracts they can assign, long inspection periods, tiny deposits, and prices that drop after you sign. Here is what to look for.