With home values rising across the country, many homeowners are seeing significant profits when they sell. While a large gain is usually welcome, it can also bring tax consequences. Depending on your profit, how long you’ve owned and lived in the home, and your income level, you may face capital gains tax — and possibly the net investment income tax (NIIT).
Save Tax With the Gain Exclusion
If you’re selling your primary residence, you may qualify to exclude up to $250,000 of gain ($500,000 for married couples filing jointly). To qualify, you must:
- Own the property for at least two years during the five years before the sale.
- Use the property as your principal residence for at least two years during that same five‑year period.
- Avoid using the exclusion more than once every two years.
Be Aware of Ineligible Gain
Profits beyond the exclusion are generally taxed at long‑term capital gains rates (15% or 20%) if you owned the home for more than a year. Short‑term gains are taxed at ordinary income rates (22%–37%).
Second homes, such as vacation properties, don’t qualify for the exclusion. Their gains are fully taxable. However, if the property is considered a rental or business asset, you may defer taxes through strategies like an installment sale or a Section 1031 exchange.
Watch Out for the NIIT
The 3.8% net investment income tax applies if your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for joint filers, $125,000 for married filing separately). Gains above the exclusion threshold or from second homes may be subject to NIIT. Importantly, excluded gains from a primary residence are not subject to NIIT.
Keep Track of Your Basis
Your taxable gain is the sale price minus your tax basis. Basis includes the purchase price plus major improvements (like a remodel or new roof). Routine maintenance and repairs don’t increase basis. You must also reduce basis for depreciation claimed or casualty losses.
If your basis exceeds the sale price, the loss usually isn’t deductible. However, losses tied to portions of the home used for business or rental may be deductible.
Plan for the Tax Impact
Selling a home can result in no tax, a significant tax bill, or something in between. Careful planning and record‑keeping are essential. Before listing your home, consult a tax advisor to estimate the impact and explore strategies to minimize liability.