Selling My Home: Will I Owe Any Tax?

For many clients, their primary home is their highest value asset. In most regions of the country, real estate values have more than doubled since the year 2000, with an average annual inflation rate = 2.88%. In certain areas such as the greater Boston area, home values have tripled or more. While this is great news for homeowners, the market appreciation may lead to capital gains taxes due when your home is sold.

For example, assume a couple (married filing jointly) purchased their home in 2014 for $500,000. In 2024 they sold it for $950,000, realizing a profit of $450,000. As long as they lived in the home for two of the past five years, they may claim a capital gains tax exemption. In this example, they do not owe capital gains tax since the $ gain is less than the $500,000 capital gains exclusion amount.

If the same home sold instead for $1,200,000, the profit = $700,000. The couple will then owe capital gains tax on $200,000 of the gain (the profit less the $500,000 exclusion). If they are in the 15% capital gains tax bracket, their tax bill = $30,000 on the sale: 15% of the $200,000 gain.

Single taxpayers may owe more capital gains tax because their capital gains exclusion threshold is lower: $250,000 for a single taxpayer versus $500,000 for married filing jointly. A single taxpayer is subject to capital gains tax once the gain exceeds $250,000.

How is the capital gain calculated?

First determine the “tax basis” in your home: its original purchase price (including the mortgage if you financed the purchase). Add the cost of any additions and improvements that increased the value of your home, prolonged its useful life, or adapted it to new uses. This figure is your tax basis. Next, take the sale price of your home, less the costs incurred to sell it, including real estate commissions. Subtract the tax basis from the adjusted sale price to compute the capital gain.

What qualifies as an improvement that can be added to tax basis? It is best to consult with your CPA and IRS Publication 523 to learn which improvements can increase tax basis (and which do not qualify). Examples of big-ticket items that can be added to your basis include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Less expensive capital improvements include new doors and windows, duct and furnace work, built-in appliances, and water heaters. Keep receipts and a detailed log of all improvements since purchasing the home.

Repairs, maintenance, and improvements necessary to keep your residence in good condition - but which do not add value or prolong its life - generally do not increase tax basis. This includes painting, landscape maintenance, and replacing broken hardware. Also, there is no “double dipping” if you had claimed a tax credit or received a subsidy for installing energy-savings improvements in your home. The cost of an energy savings system must first be reduced by the tax credit or subsidy before adding it into your home's tax basis.

If you have questions about this topic, reach out to a financial professional. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.