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Understand the federal home-sale tax exclusion
Whether you owe taxes when selling a home depends on your profit and whether you qualify for a tax exclusion. According to the Internal Revenue Service (IRS), eligible homeowners may exclude up to $250,000 in gains from federal income tax, or up to $500,000 for qualifying married couples filing jointly.
Generally, you must have owned and lived in the property as your primary residence for at least two of the five years before selling. You also must meet rules concerning previous use of the exclusion. Certain circumstances, including job changes or health-related moves, may qualify for a partial exclusion.
Calculate your gain before estimating taxes
Taxes are generally based on the gain from selling your home, not the total sale price. The IRS calculates gain by subtracting eligible selling expenses and the property’s adjusted cost basis from the sale price. Your adjusted basis generally includes the original purchase cost plus qualifying capital improvements.
For example, replacing a roof or completing a major kitchen renovation may increase your basis and reduce your taxable gain. Routine maintenance generally does not qualify. Paying off your remaining mortgage affects your proceeds at closing, but it does not reduce the gain used to calculate income taxes. Keeping records of purchase costs, improvements, and selling expenses can make tax planning easier.
Consider Pennsylvania taxes and special circumstances
Pennsylvania also generally excludes gains from the sale of a qualifying primary residence when ownership, occupancy, and other requirements are met. However, Pennsylvania’s realty transfer tax is a separate transaction expense. The state imposes a 1% transfer tax, and additional local transfer taxes commonly apply.
Special circumstances can change the tax treatment. Rental or business use, inherited property, and gains exceeding the federal exclusion may require additional calculations. Even an excluded federal gain may need to be reported if you receive Form 1099-S. Before selling, consult a qualified tax professional to determine your potential liability and identify any available exclusions.
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