Tax Implications of Selling Your Home in San Francisco Bay Area

When you sell your home, the capital gain is the difference between the selling price of the house and the “basis” or cost of the home. This includes:

• The original purchase price of the home.
• Costs associated with buying the home, such as closing costs and legal fees.
• The cost of any significant home improvements made while you owned the home (such as a kitchen remodel or adding a deck).

For example, if you bought your home for $300,000 and sold it for $500,000, but you had invested $50,000 in home improvements, your capital gain would be:

The IRS offers a significant tax break for homeowners selling their primary residence. As long as certain criteria are met, you can exclude a portion of the capital gains from taxation:

• Single homeowners can exclude up to $250,000 of capital gains.
• Married couples filing jointly can exclude up to $500,000 of capital gains.

To qualify for this exemption, the home must meet the following criteria:

• Ownership Test: You must have owned the home for at least two years during the five years preceding the sale.
• Use Test: You must have lived in the home as your primary residence for at least two of the last five years before the sale.

It’s important to note that these two years don’t have to be consecutive. For example, if you lived in your home for a year, rented it out for two years, and then lived in it for another year, you would still qualify for the exemption.

If you used part of your home for business or rental purposes, the IRS may still allow you to claim a partial exclusion. The capital gains from the portion of the home used for personal residence would be eligible for the exclusion, while the portion used for business or rental purposes may not.

When selling your home, you may indeed be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller. According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”

For such an exclusion, you’ll have to meet these qualifying criteria . . . 

• “You’ve owned the home for at least two years during the past five years prior to the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
• The home was your principal residence for a minimum of two of the five years prior to the sale. For those married and filing jointly, both spouses must meet this requirement.
• “You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.”

If you think you may qualify, be sure to consult a San Francisco Bay Area agent. To discover more, call (408) 557-7554.

Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in San Francisco Bay Area. The special qualifying circumstances here include . . . 

• Gaining ownership of the home during a separation/divorce
• If your spouse died during your ownership of the home
• Owning a “remainder interest” in the home when selling
• Having your previous home condemned
• Being a service member during your ownership of the home
• Releasing the home in a “like-kind” exchange

Calculating Capital Gains Tax

If, on selling your home, you want to calculate your probable capital gains tax, you will need to determine the cost basis for the home.

The cost basis includes what you spent to buy the home, as well as any money spent on improvements over the years. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”

“From there, you can add up the purchase price of the home, minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale.” This will yield the amount subject to capital gains tax.

If you’ve rented out part of your home or used it for business purposes, you may have taken depreciation deductions on that portion of the property. When you sell the home, the IRS requires you to pay taxes on the depreciation you’ve claimed, which is known as depreciation recapture. The recaptured amount is taxed at a rate of up to 25%.

The IRS does provide exceptions for homeowners who don’t meet the full ownership and use tests if the sale was due to unforeseen circumstances, such as:

• A job relocation that required you to move more than 50 miles from your home.
• Health-related reasons.
• Certain family emergencies or natural disasters.

In these cases, you may still qualify for a reduced capital gains exclusion, prorated based on how long you lived in the home.

Many states impose their own capital gains taxes, though the rates and rules differ. Some states tax all capital gains as ordinary income, while others have special capital gains tax rates. Be sure to check the specific tax laws in San Francisco Bay Area to determine if state capital gains taxes will apply to your sale.

In some areas, including San Francisco Bay Area, you may be required to pay a real estate transfer tax when you sell your home. This tax is typically calculated as a percentage of the sale price and can vary depending on the city or county. Check with your real estate agent or a local tax professional to find out if this applies to your sale.

Some municipalities impose additional taxes or assessments, such as property tax arrears or special assessments for improvements like roads or sewers. These costs are typically settled at the time of the sale, but it’s important to account for them when calculating your net profit.

Certain selling costs, such as real estate commissions, legal fees, and closing costs, can be deducted from your capital gains when calculating your taxable profit. This can help reduce your overall tax burden.

If you made major improvements to your home, such as adding a new roof or renovating the kitchen, the costs of these improvements can be added to the basis of your home, thereby reducing your capital gains. Be sure to keep detailed records and receipts of any improvements you’ve made.

Military members who are selling their home may be eligible for special tax breaks. The IRS allows military members to suspend the five-year ownership and use tests for up to 10 years if they are on active duty and stationed at least 50 miles from home. This can allow military personnel to qualify for the capital gains exclusion even if they haven’t lived in their home for the required two years.