In most cases, if you sell a home for more than you bought it, you won't have to pay any tax on the profit. However, if you haven't owned or lived in the home very long, if your profit is especially large, or if the home wasn't your primary residence, you might wind up owing capital gains tax.
The tax code allows you to exclude from taxes the first $250,000 in profit from your home sale -- or the first $500,000 if you're married and file your taxes jointly. To get this exclusion, however, you must have owned the home and used it as your primary residence for at least two years during the five-year period prior to the sale. That two-year requirement doesn't have to be consecutive, meaning that you could live in your house for two years, rent it out to someone else for a year or two, and then sell it and still claim the exclusion. There's no absolute limit on the number of times you can claim an exclusion in your lifetime, though you must wait at least two years between exclusions.
Capital Gains Tax
If you did not own and live in the house for the required two years, then you will owe capital gains tax on the entire profit from the sale. If you're single and make a $265,000 profit, for example, your taxable profit is the full $265,000. If you meet the two-year requirement but your profit exceeds your exclusion amount, then you will owe capital gains tax only on the excess. In that case, if you are single and make a $265,000 profit, capital gains tax will apply to $15,000 of your profit.
Determining Your Profit
You can get a rough estimate of your profit by comparing how much you paid for the home with how much you sold it for. But your true profit, which matters for tax purposes, depends on several other factors.
Add up all the expenses of selling your home, such as commissions, advertising costs and legal fees. Subtract these from the selling price. The result is what the IRS calls the "amount realized" on the sale. Next, determine your "adjusted cost basis," which is the price you originally paid for the home, including certain closing costs and the cost of any capital improvements you've made -- improvements that added value or increased your home's useful life. Once you've determined your adjusted basis, subtract it from your amount realized. The result is your profit for tax purposes.
Figuring Your Tax
If you owned the home for less than a year before you sold it, the IRS classifies your profit as a short-term capital gain, which is taxed at the same rate as regular income. At the time of publication, those rates start at 10 percent and go as high as 35 percent, depending on your income. If you owned the home for more than a year, the profit qualifies as a long-term capital gain, which is taxed at a much lower rate. At the time of publication, long-term capital gains taxes topped out at 15 percent.