You may have thought about the tax benefits of buying a home, but you probably haven't thought much about the taxes you'll pay when you sell your home.
As you can imagine, the taxes on a home sale could theoretically be a small fortune, enough to almost scare you away from selling at all.
So if you're looking to be proactive and prepared, here are answers to some questions you may have.
Can I Avoid Paying Taxes on a Sale of a Home?
Yes. There is a very good chance that you won't pay taxes on your home sale. In fact, if you've been worrying about this, it may be for nothing.
When you make money from the sale of your home, the IRS typically lets home sellers keep the first $250,000 they earn from the sale of the house. (That's $250,000 if you're single; if you're married and filing jointly, you get to keep $500,000 of capital gains.)
So What Happens if the Capital Gains Are Higher Than the $250,000 or $500,000 Thresholds?
In that case, you may be subject to capital gains taxes.
Here's a hypothetical scenario to give you a sense of how much you might pay if you sell a home for well over $500,000 as a married couple filing jointly.
According to David Reyes, financial advisor and CEO of Reyes Financial Architecture in San Diego, if you bought a house 10 years ago for $350,000 and sell it now for $1 million (a relatively reasonable hypothetical in California), "you would owe taxes on any amount over the $500,000 -- which would be $150,000."
As in, you would owe taxes on that $150,000 (rather than having a $150,000 tax bill).
That said, you can probably get that $150,000 number to shrink a bit. "The IRS allows you to deduct certain closing costs such as title insurance and attorney fees. You can also deduct the commission that you pay your real estate agent. You may also deduct any home improvements that you made to the property. This figure becomes your cost basis," Reyes says.
Those home improvements, incidentally, could add up to a lot. Did you replace the roof recently? Did you add a swimming pool to your backyard, or perhaps renovate the kitchen or add a room to the house? Hopefully you saved the receipts.
Reyes says that after all these deductions, you would pay taxes on the net proceeds.
"Let's say that your total of all eligible deductions is $50,000. You would pay capital gains taxes on the (remaining) $100,000," Reyes says. "Depending on your tax bracket, you could pay taxes of up to 20% federal income taxes, plus state taxes. This would be a tax of $20,000, plus state income tax."
[Read: What's My Tax Bracket?]
State Income Tax?
Yes, you may have to pay state income tax with the sale of your home -- but you shouldn't when the federal taxes are exempt. Still, check with your tax preparer just to be sure. "Every state is different," Reyes says.
How Do I Report the Sale of My Home on My Income Taxes?
You may not have to. Says Reyes: "If you have a gain on your home that is under the exclusion, you do not have to report this on your tax return. If you do have a gain that is above the exclusion, you must report it on the Schedule D of your 1040."
The Process of Paying Taxes on the Sale of a Home Sounds Fairly Easy. Can It Really Be That Easy?
For most people, yes, but there may be some complications to consider. We'll run through some of the bigger ones.
The home is a rental. Is this a house that you don't live in? Or maybe you did 10 years ago and then you rented it out, and now you're selling the home? Even if you are making less than $250,000 or $500,000, you will be paying taxes on the sale. But keep in mind: If you lived in the house for a minimum of two years within the last five years, and you rented it out for the remainder of that period, you will avoid paying taxes if the profits are under the $250,000 or $500,000 thresholds.
The home is a vacation home or a second home. Again, you'll be paying taxes on the house. It needs to be your primary residence.
Within the last two years, you sold a home -- and claimed the $250,000 or $500,000 exclusion. So you sold a house and didn't have to pay the taxes on it? Awesome. But you did that 20 months ago? You will probably have to pay taxes.
[Read: How to File Back Taxes.]
Did You Say Probably?
You might be able to get an exclusion, or at least a partial one. This is one of those cases where it wouldn't be a bad idea to talk to a tax preparer. In fact, whenever you are selling or buying, it's generally a good idea to talk to a tax preparer to see how the home will affect your taxes. But if you sold a house 20 months ago and bought a new house with your spouse, and now you're divorcing and selling the home to one or the other, you might be able to get an exclusion.
You may also be able to get an exclusion if your spouse died, and now you're forced to sell the house.
If you lost your job and are now receiving unemployment benefits, you can probably get an exclusion.
But getting a partial or full exclusion doesn't have to involve a tragic reason. For instance, if you and your spouse are having twins, triplets or even more kids, and you have suddenly outgrown the house, you may be able to get an exclusion. If that's the case, you'll want to talk to a tax preparer, and along with all of the parenting and baby books you're buying, consult the IRS's "Publication 523 (2019), Selling Your Home."
More From US News & World Report