Dear Credible Money Coach,
We put over $100,000 into a bungalow for repair. Do we get to subtract our $100,000 from the sale to get our out-of-pocket money back? And if we sell a home, must we put the money into another home, or may we keep it? — Linda
Hi Linda, and thanks for your question. The short answer is that profit (after paying a mortgage and sale-related costs) is yours to keep when you sell real estate. You’re not required to use the proceeds to buy another property.
However, unless you qualify for an exemption, you must pay capital gains tax. I’ll cover more about that in a moment.
Using proceeds from a home sale
When you sell a home or investment property, there are various expenses you must cover with your proceeds. First, any outstanding taxes or liens on the property must get settled. Also, most property owners have a mortgage to pay off. Plus, you must pay typical closing costs, such as a real estate brokerage commission, title insurance, and attorney’s fee. Then any remaining amount is yours to manage any way you like.
Taxes when you sell a house
Even though home values can dip during economic downturns like the Great Recession, they’ve appreciated in most parts of the country over time. You generally owe capital gains tax if you sell an asset, including real estate, for more than you paid. However, if you lived in your primary residence for two of the five years before selling it, you typically qualify for a capital gains tax exemption. It allows you to exclude up to $250,000, or $500,000 if you’re married and file taxes jointly, of gain from your home sale.
To calculate capital gain on a home sale, you must figure your basis, which includes purchase costs and capital improvements (such as the cost of a new roof or major renovation). Then you subtract your home’s selling costs (such as points and legal fees), depreciation, and any casualty losses from its selling price.
Capital gains tax rate
Capital gains tax rates range from 0% to 20%, depending on your taxable income, tax filing status, and how long you owned and lived in your home.
If you’re unsure how selling real estate affects your taxes, always speak with a qualified tax accountant who can help you understand your options and obligations.
Ready to learn more? Check out these articles …
- How to pay off your mortgage early
- How to refinance your mortgage
- Should you pay off your mortgage or invest the money?
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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.