“Flippers pay capital gains,” Allen summarizes. “If you lived in the home awhile, you [probably] won’t owe capital gains.”
As a seller, you may also be liable for capital gains tax. This refers to the taxes you owe on profits achieved from the sale of an appreciating asset — your home.
The first $250,000 of profits resulting from the sale of a primary residence are typically not taxed under the capital gains tax exclusion if you file your taxes as single (or $500,000 for married couples filing jointly) — as long as you meet additional requirements. This is known as the Section 121 exclusion.
If you don’t qualify for capital gains tax exclusions, you must report your home to the IRS through a 1099-S form.
If you sell a second home, you may have to pay capital gains tax at a rate of up to 20%, depending on your tax bracket and other factors, including how long you’ve owned the home, cost of ownership, and any other fees you’ve incurred or capital improvements you’ve paid for. Second homes include vacation homes and rental homes, which are investment properties.
To help you navigate the complicated world of real estate taxes, consult a real estate accountant or your financial advisor. They can help mitigate your capital gains tax by advising you on how you can reduce it.
More expert tips and insights about home sale proceeds
Want to dig a little deeper? Here are some additional insights into home sale proceeds and profit.
How long do you need to be in a house to make money?
The old five-year rule doesn’t always apply these days. Today, appreciation is the key. Has your home increased in value enough for you to earn a profit on its sale? In 2022, the average appreciation rate is 14.5%, a significant increase since 2019, when it was 4%. In 2023, experts continue to see year-over-year price growth, though not at the same level as the prior two years.
According to Allen, due to inflation over the past three to five years, many homeowners move within 12 months of buying their home. “They still make money,” he says. It’s all about supply and demand.
What are the most common closing costs on a house?
You can almost certainly count on paying the real estate agent commission, which typically ranges from 5% to 6%, with 50% going to each agent. You’ll also be on the hook for the mortgage payoff amount on the house you just sold, assuming you had a mortgage on it. While some may not apply to each transaction and almost everything can be negotiated, other commons closings costs can include:
- Transfer taxes
- Recording fees
- Title insurance fees
- Unpaid homeowners association (HOA) dues
- Unpaid real estate taxes
- Seller concessions
- Attorney fees
- Outstanding liens or judgments
