June 26, 2022

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Here’s How Your 2021 Home Sale Might Affect Your Tax Bill This Year

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With just one month left in the 2022 tax season, if you haven’t already started taking steps to figure out what your tax bill looks like this year, you probably should start soon.

As we’ve been navigating a heated housing market since 2020, many buyers and sellers have likely made life-changing decisions when it comes to their property. Those who were able to sell their homes in 2021 likely achieved a sizeable profit given the astronomical jump in home prices. But for some people, that doesn’t necessarily mean that their home sale will result in pocketing all the profits.

If you sold your home in 2021, it’s important to understand how those profits might impact your tax liability this year.

“If you sold a home in 2021 and were fortunate to make a large profit on the deal, be aware that you may have an unexpected tax bill on this capital gain,” says Isabel Barrow, the Director of Financial Planning at Edelman Financial Engines. ” How much you may owe depends on a few key factors. Was it a primary residence, a secondary residence, or a rental property? Are you single, married, divorced, or widowed? How long did you hold the property for? What state do you live in?”

Below, Select breaks down what you need to know about how profits from your home sale might affect your tax.

Primary residence vs. secondary residence

Primary residence

If you sold your primary residence — a.k.a., the property where you usually live — in 2021, you may actually qualify to be exempt from paying taxes on those capital gains.

“If the home was a primary residence, the result is less complicated since many people will enjoy a sizable exemption on their gain — up to $250k for single filers and $500k for married couples filing jointly,” Barrow explains.

You must meet some conditions in order to qualify for the exemption, though. According to the IRS website, you must have owned and used the property as your primary residence for a minimum of two years out of the five years prior to the sale. And, you can only use the exemption for one property sale within a two-year timeframe.

And if the capital gains on your home sale is greater than the amount you’re allowed to exclude from your tax bill, Barrow recommends speaking to a financial planner or accountant who can help you figure out if you can account for any home improvements you paid for that may increase your cost basis and lower your tax liability.

But if you choose not to work with a financial planner or an accountant and instead decide to file your taxes on your own, you might benefit from using a tax filing service that can provide assistance along the way in case any big questions come up. TurboTax has a Live service that allows you to get on-demand advice and get your tax filing reviewed by an expert before you submit it. This can come in handy for such a complex event like selling your home.

TurboTax

On TurboTax’s secure site

  • Cost

    Costs may vary depending on the plan selected – see breakdown by plan in the description below

  • Free version

    Yes (for simple returns** only)

  • Mobile app

  • Live support

  • Better Business Bureau rating

Pros

  • Step-by-step guidance with a Q&A format that is easy to follow
  • TurboTax Live provides on-demand advice and a final review from a tax expert
  • Live Full Service has a tax expert prepare, sign, and file your return
  • Accuracy and maximum refund guaranteed*
  • Audit support, which provides free assistance if you get an IRS or other tax notice

Cons

  • More costly than other software programs
  • Live expert assistance plans have additional costs

Cost breakdown by plan:

  • Free (for simple returns** only): $0 federal, $0 per state
  • Deluxe (helps you maximize credits and deductions): $39* federal, $39* per state
  • Premier (includes returns with investments and expenses): $69* federal, $39* per state
  • Self-employed (for personal and business income and expenses): $89* federal, $39* per state
  • Live Basic (includes help from tax experts): for a limited time, $0* federal, state included – simple tax returns only; must file by 3/31
  • Live Deluxe (includes help from tax experts): $119* federal, $49* per state
  • Live Premier (includes help from tax experts): $169* federal, $49* per state
  • Live self-employed (includes help from tax experts): $199* federal, $49* per state
  • Full Service Live Basic (includes help from tax experts): for a limited time, $0* federal, state included – simple tax returns only; must file by 2/15
  • Full Service Live Deluxe (includes help from tax experts): $249* federal, $49* per state
  • Full Service Live Premier (includes help from tax experts): $359* federal, $49* per state
  • Full Service Live self-employed (includes help from tax experts): $389* federal, $49* per state

*Click here for TurboTax offer details and disclosures

**A simple tax return is Form 1040 only.

Other tax filing services, like TaxAct, have features that guide you through how to file your taxes if you’ve recently sold a home.

TaxAct

  • Cost

    $0 to $160.96 federal, $39.95 to $54.95 per state (see breakdown by plan below)

  • Free version

  • Mobile app

  • Tax expert support

  • Better Business Bureau rating

Pros

  • Up to $100,000 accuracy guarantee, which reimburses you for IRS/state penalty or interest if the TaxAct software causes a calculation error in your return
  • More affordable than other paid software
  • One-on-one support from real tax experts (costs extra)
  • Maximum refund and 100% accuracy guarantee, or TaxAct will refund the plan fees you paid and pay any difference in the refund or tax liability, plus cover any legal or audit costs up to $100,000

Cons

  • Free plan charges per state return
  • Xpert help plans cost at least $35 more for federal

Cost breakdown by plan:

  • Free (only covers simple returns): $0 federal, $39.95 per state
  • Deluxe (helps you maximize credits and deductions): $38.36 federal, $54.95 per state
  • Premier (includes returns with investments and expenses): $57.56 federal, $54.95 per state
  • Self-employed (for personal and business income and expenses): $75.96 federal, $54.95 per state
  • Xpert Help Free (includes help from tax experts): $70.00 federal, $39.95 per state
  • Xpert Help Deluxe (includes help from tax experts): $93.36 federal, $54.95 per state
  • Xpert Help Premier (includes help from tax experts): $127.56 federal, $54.95 per state
  • Xpert Help Self-employed (includes help from tax experts): $160.96 federal, $54.95 per state

Secondary residence

If you held onto your secondary residence for at least one year, you’ll pay long-term capital gains taxes on your profit, up to 15%. But if you held the residence for less than one year, you’ll be taxed at your ordinary income tax rate, which is often higher than the long-term capital gains rate.

As you might be able to see, there is more of a tax benefit to holding a property for as long as possible. Of course, if you’re unable to hold onto the home for more than a year because of personal circumstances, don’t let the tax burden deter you from doing what would be best for you; work with a financial planner or accountant to explore ways you might be able to lower that tax bill or even reach a different solution.

How long you’ve held onto the property

“If you’ve held the property for less than a year, short-term capital gains rates would typically apply,” Barrow says. “These are generally the same as ordinary income tax rates, which are higher than long-term capital gains rates.”

Barrow also notes that those who have held onto their home for many years may now be selling their homes for a significant profit. In this case, they may end up owing taxes on any gains that exceed the primary home exemption amount. Those gains would be taxed at the long-term capital gains rate, which could be 0%, 15%, or 20%, depending on the tax bracket of the owner.

As such, it can be very beneficial to keep a record of all your home improvement costs so you can use these expenses to add to your cost basis (the amount you paid for the home) and potentially lower your capital gains tax liability.

Where the property is located

Any additional state and sales taxes owed would depend on the state in which the property is located. For example, if you sell a home in New Jersey, you won’t owe sales tax but you also won’t be able to deduct mortgage interest, capital improvements, or energy saving purchases on your state taxes (but you can deduct these costs from your federal taxes).

In New York, though, residents who sell their home must pay 15% of profits for state taxes and an additional 10% for city taxes (if the home is located in the New York City boroughs).

Other considerations

When it comes to your overall tax bill, any investments in the stock market you may have can also play a role in how big of a tax burden you have to take on this year after a home sale.

“You may be able to offset some of these gains with losses, regardless of the type of investment generating the loss,” Barrow said. “This means you can take stock market losses to offset your real estate gains.”

So if you had to sell off an investment for a loss last year and you also sold your home for a profit, you can use that stock market loss to your advantage to further reduce your tax bill for the home sale.

You should also keep in mind that you may owe a 3.8% net investment tax on top of any other capital gains taxes you’ll owe for your home sale, according to the IRS website. Whether or not you would be subject to the net investment tax would depend on your income and tax filing status.

If you’re married and filing jointly, you’ll be subject to the net investment tax if your household earns more than $250,000. If you’re single, you’ll only be subject to the tax if you earn more than $200,000. For the full breakdown of income thresholds, take a look at the IRS website.

Preparing for a home sale

“To prepare for a home sale, no matter how far in the future it may be, it’s important to retain your records,” Barrow explains. “Save everything related to improvements on your home. Create a file with your receipts, expenses, and save them — even 20 years from now these may be important!”

It may also be helpful to speak to a financial advisor or accountant before putting your home on the market to make sure you understand the implications of selling your home given your unique circumstances (when you bought it, how long you’ve lived in it, etc.).

Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.