I’m selling my house and getting $400,000 to “pay off my retirement home”. Do I have to pay capital gains tax?

Financial advisor and columnist Matt Baker

Financial advisor and columnist Matt Baker

I am selling my house and the price is $504,999. After this house is paid off, I will have $400,000. Do I have to pay capital gains tax because I plan to pay off my retirement home with the money I raised?

– Thomas

The answer is solidly “it depends”, both in terms of whether you have to pay Capital gains tax and the amount you may have to pay. Let’s talk about the rules around this situation first, and then we can get into some examples to see how they work.

Is selling your home taxable?

The IRS allows single filers to exclude up to $250,000 in capital gains from the sale of their home, and married couples file to exclude up to $500,000, if they meet certain criteria.

in order to qualify for either of those exceptionsall of the following must be true:

  1. You must have owned the home for at least two of the five years immediately preceding the sale.

  2. You must have used the home as your primary residence for at least two of the five years immediately preceding the sale.

  3. You cannot claim an exclusion in the two years immediately preceding the sale.

If you meet all of these criteria, you can claim exclusion. If any of these criteria are incorrect for you, you will have to pay Capital gains taxes on all proceeds.

Let’s look at some examples.

Example 1: Satisfying the exclusion criteria, presenting the jointly married couple

Let’s say you sell the home you’ve owned and lived in for the past few years, and you’re married and collect taxes together.

In this case, you would be eligible to exclude $500,000 from the sale of your home. Since you get $400,000, which is less than an exclusion, you won’t have to pay any capital gains tax on those returns.

Example 2: Meets exclusion criteria, Single

One man calculates his capital gains taxes

One man calculates his capital gains taxes

Let’s assume the same situation as above, except that in this scenario you are single instead of married together. In this case, you will be eligible for an exception but it will only be $250,000. With $400,000 in revenue, that means $150,000 would be subject to capital gains tax. The question, then, is what percentage of taxes will be levied on those revenues. You can Click here for a full breakdown of capital gains tax ratesbut let’s say you fall into the 15% category.

Multiplying $150,000 by 15%, you would have to pay $22,500 in taxes, leaving you with a net proceeds of $377,500. Of course, you may also be subject to state income tax, which will increase the amount you have to pay.

Example 3: Does not meet the exclusion criteria

If you don’t meet the exclusion criteria, the entire $400,000 will be taxed as capital gains. In this case, the first big question is whether or not these gains are taxable Short-term or long-term capital gains.

If you’ve owned the home for a year or less, your returns will be taxed as short-term capital gains, which means they’ll be subject to the same tax rates as ordinary income.

Let’s say you’re a married couple filing jointly and you and your spouse have $100,000 in income other than the sale of your home. The $400,000 in proceeds will push your regular gross income up to $500,000 and into the 35% tax bracket, but because of our progressive tax law, not all of that money will be taxed at the 35% rate.

Again, you can Click here for a full breakdown of the 2023 tax bracketsbut here’s how that applies to your $400,000 home proceeds in this case:

  • $90,750 will be taxed at 22% = $19,965 in taxes

  • $173,450 will be taxed at 24% = $41,628 in taxes

  • $98,300 will be taxed at 32% = $31,456 in taxes

  • $37,500 will be taxed at 35% = $13,125 in taxes

That’s a total tax bill of $106,174 on just the sale of your home, leaving you with a net proceeds of $293,826. Although there may be state income taxes on top of that.

If you keep your home for a year or longer, you’ll only have to pay the lower long-term capital gains rate. Using the same example above, with $100,000 in taxable income Aside from selling your home, the entire $400,000 will be subject to capital gains tax at 15%. That’s a $60,000 tax cost, for the $340,000 net proceeds from the sale of your home.

There are exceptions

There are exceptions to the general rules listed above. You can click here To get an overview of these exceptions, you can click here For details regarding all of these rules.

But for the most part, it comes down to whether you own the home and have lived in it for at least two of the past five years. If so, you will be eligible for a senior exception. If not, you will have to pay capital gains tax on the full amount.

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The man reviews documents related to his capital gains tax liability.

The man reviews documents related to his capital gains tax liability.

The determination of the capital gains tax that may be due on the sale of the home depends on several factors. The first is whether you meet the $250,000 exclusion criteria for single applicants and $500,000 for couples applying together. The second factor is how long you have been in the home and whether it is your primary residence. In addition, you must not have claimed the exclusion in the two years prior to selling the home. Keep in mind, however, that there are exceptions

Tax tips

  • If you do not have a financial advisor yet, it will not be difficult to find one. Free SmartAsset tool It matches you with up to three vetted financial advisors who serve your area, and you can place free introductory calls with your advisor matches to select the one they feel is a good fit for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.

  • we have free Capital Gain CalculatorIn the short and long term, they can be used to make gains from the sale of a variety of assets, not just a home.

  • Check out our No Cost Property tax calculator To get a quick estimate of what you will owe based on the location of the property and its estimated value.

Matt Baker, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions on personal finance and tax topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAdvisor Match platform, and has been compensated for this article.

Photo credit: © iStock.com/: ArLawKa AungTun, © iStock.com/designer491

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