Does Selling a House Count as Income

Capital Gains and Taxes on a Sold House

Capital gains are the profit made from the sale of your home (or other assets). For example, if you sell your home for more than what you paid for it, the difference between the two prices is considered capital gains.

When selling a house, you may be subject to capital gains taxes, which depend on your:

• Income level: Your overall taxable income.  
• Ownership duration: Determines whether you pay short-term or long-term capital gains taxes. 
• Filing status: Single, married filing jointly, married filing separately, or head of household.

Home Sale Exclusion

The home sale exclusion lets eligible homeowners exclude a portion of their capital gains when selling their primary residence. You can document a home sale exclusion on your tax return if you meet a set of criteria. 

Eligibility Requirements for the Exclusion

To claim the home sale exclusion, you must meet the following requirements, also known as the ownership and use test:

• You must have owned the home for at least two years in the five years before the sale.
• The home must have been your principal residence for at least two of the same five-year period.
• You must not have excluded another home from capital gains in the two-year period before this sale.

You can exclude up to $250,000 if you’re single or $500,000 if you’re married and filing jointly. Widowed taxpayers may be able to claim the exclusion if:

• They haven’t remarried
• It has been less than two years since their spouse’s passing
• Their spouse hasn’t used the tax exclusion on another home within the period
• They meet the ownership and use tests

When Selling a House Counts as Taxable Income

If you do not meet the criteria above, your home sale profit likely counts as taxable income. 

Profit Exceeding the Exclusion Limit

Any gain from the sale that exceeds the exclusion limit ($250,000 for single filers or $500,000 for married couples) is considered income. You will pay taxes on this profit based on your income and ownership duration. 

Selling a House That’s Not Your Primary Residence

When selling a home, such as a vacation home, invested property, or inherited property, it may qualify as income. These properties do not qualify for a home sale exclusion, meaning you may owe capital gains taxes on the entire profit:

• Second or vacation homes: They qualify as investment properties unless you convert them into primary residences and meet the ownership and use tests. Some people will transform an investment property into their residence so they can enjoy the tax benefits of the primary residence tax exclusion.
• Rental properties: Rental or investment real estate properties are always subject to capital gains tax. You must also report the sale and taxable gain to the Internal Revenue Service to ensure you pay the correct amount of capital gain tax.
• Inherited homes: Subject to capital gains tax, but the value is calculated on a stepped-up basis. The tax basis is not the original purchase price, but the value of the home at the time of the previous owner’s death, which is what the selling price would be. They are always considered long-term capital gains. If you’ve recently inherited a home, you may also want to learn whether there’s a time limit on selling inherited property before making a decision.

Short-Term vs. Long-Term Capital Gains

There are different tax rules depending on how long you have owned the property. 

Short-term capital gains refer to the profit from the sale of an asset that’s been held for less than a year. [1] They are taxed based on your ordinary income tax. Most are typically taxed at 10%, 12%, 22%, 24%, 32%, 35%, or 37%.

Long-term ones refer to the profit gained from the sale of properties held for over a year. According to the Internal Revenue Service (IRS), the capital gains tax rates are 0%, 15% or 20%. Most people pay up to 15%. Typically, taxes on long-term capital are more affordable. 

If you’re considering the timing of your sale, it may help to know whether you can sell your house after a year to potentially benefit from long-term capital gains rates.

Reducing Capital Gains Tax

While you cannot avoid capital gains taxes, there are ways to reduce how much you owe. This includes deducting various expenses and using a 1031 Exchange. 

Deductible Expenses

One way to reduce the overall gains on your income tax return is to deduct certain home expenses to lower your overall tax bill. However, not all costs apply for deductions, and the ones that do must be well-documented. 

Deductible expenses include:

• Selling costs: This includes closing costs, appraisal fees, and most things you paid to attorneys or real estate agents before the date of the sale. These costs impact how much profit you make. 
• Property taxes: If you pro-rate or share the property taxes, you may be able to deduct them. Make sure you report any taxes you pay on properties you own, including your primary home. 
• Major home improvements: Improvements can increase your cost basis (purchase price plus capital investments) and affect the overall calculation. They include significant changes like remodels, major roof upgrades, decks, and insulation. Landlords often perform these upgrades between tenants on a rental property.

Tax-Deferred Exchanges (1031 Exchanges)

A 1031 Exchange is a tax strategy that lets you defer capital gains taxes by reinvesting the proceeds from the sale into another, like-kind property.

In other words, if you reinvest immediately into a similar property, you won’t pay capital gains tax until you sell the new property. However, you must do all of this within a brief timeframe and close the new deal within 180 days. 

Potential Taxes When Selling to a Cash Home Buyer

When selling to a cash home buyer, you still have to follow the same tax rules. However, some sellers may be able to use the smoother, faster process to their advantage. If you’re interested in all the ways you can benefit from a cash sale, especially as an aspiring investor, consult a tax professional.

A Quick Sale Might Be Better for Tax Purposes

While you must pay capital gains taxes either way, a cash sale sometimes offers more flexibility to people who want to invest in real estate.

First, you can control the timing of the sale and speed up or delay the timing so that it fits into the most convenient tax year. This lets you use strategies such as tax loss harvesting more efficiently. 

Another common reason people choose a cash buyer is using a 1031 exchange. Since you only have 45 days to designate a property you wish to buy and then another 135 days to close the deal, a traditional sale may be too drawn out.

A-List Properties offers fair, fast, and reliable cash home offers — contact us at (972) 526-7042.