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How to Understand and Reduce Taxes When Selling Your Home

If your home’s value has soared, congratulations. If you decide to sell, beware.

How Tax rules have changed:

Until 1997, home sellers didn’t have to pay taxes on their profits if they bought another home of equal or greater value within two years. In addition, people 55 and older could use a one-time exclusion to avoid paying taxes on up to $125,000 of home sale profits.

The Taxpayer Relief Act of 1997 changed the rules so that instead of rolling profits into another home, homeowners could exclude up to $250,000 of home sale profits from their income. To qualify for the full exclusion, home sellers must have owned and lived in the home at least two of the five years prior to the sale. Married couples could shelter up to $500,000.

Those exclusion limits haven’t changed in 25 years, while home values have nearly tripled. The median home sale price when the law passed was $145,800, according to the Federal Reserve Bank of St. Louis. The median was $428,700 in the first three months of this year. Median means half of homes sold for less and half for more.

Why your tax basis matters: Let’s say you realized $600,000 from your home sale. You originally bought it for  $200,000 and remodeled the kitchen for $50,000. You’d subtract that $250,000 from the $600,000 to get $350,000 in capital gains.

read more at: https://www.nerdwallet.com/article/finance/how-to-understand-and-reduce-taxes-when-selling-your-home