Your home sale could trigger capital gains taxes. Here’s how to calculate your bill

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  • More home sellers now owe capital gains taxes after selling their primary residence, but it is possible to reduce the bill.
  • There are no taxes on the first $250,000 of profit if you are single, or $500,000 for married couples filing jointly, assuming you meet IRS rules.
  • You can lower profits above those thresholds by adding to your home’s “basis,” or original purchase price, with closing costs and eligible improvements.

There are strict IRS rules to qualify for the $250,000 or $500,000 exemptions. Any profit above those limits is subject to capital gains taxes, levied at 0%, 15% or 20%, based on your earnings.

“It is important to track your cost basis of the home,” which is your original purchase price plus closing costs from the purchase, according to Thomas Scanlon, a certified financial planner at Raymond James in Manchester, Connecticut.

You can reduce your home sale profit by adding often-forgotten costs and fees to your basis, which minimizes your capital gains tax liability.

For example, you can start by tacking on fees and closing costs from the purchase and sale of the home, according to the IRS. These may include:

  • Title fees
  • Charges for utility installation
  • Legal and recording fees
  • Surveys
  • Transfer taxes
  • Title insurance
  • Balances owed by the seller

These could be small amounts individually but have a significant effect on the basis when tallied.

The average closing cost nationwide is $4,243, according to a report from Assurance, but fees vary widely. In the priciest state, New York, the average is $8,039, while California is a close second at $8,028.

“You also get credit for the expenses for the sale of the property,” added Scanlon, who is also a certified public accountant. That includes your real estate commissions and closing costs.

However, there are some fees and closing costs you cannot add to your basis, such as home insurance premiums or rent or utilities paid before your closing date, according to the IRS.

Similarly, loan charges such as points, mortgage insurance premiums, the cost to pull your credit report or appraisals required by your lender will not count.

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