At different points in life, major financial events can create both opportunity and uncertainty. Guided by our purpose of helping make people’s lives better, we continue our Life Events series focusing on the financial transition of selling a home.
A home sale can be one of the more tax-significant events in a given year. The rules are not complicated, but the details matter, and a little planning can make a meaningful difference in what you actually keep.
The Gain Exclusion: What You Need to Qualify
When you sell a principal residence, you may be able to exclude up to $250,000 of gain from taxation ($500,000 for married couples filing jointly). To qualify, you generally need to have owned and lived in the home for at least two of the last five years.
If you had to sell before hitting that two-year mark due to a job change, health issue, or other unforeseen circumstances, a partial exclusion may still be available. It is worth asking rather than assuming you do not qualify.
If You Own More Than One Property
The exclusion applies only to your principal residence, which makes the designation itself a planning decision and not just a factual one. If you own multiple properties, which one you designate as your primary home, and when, can have real tax consequences when any of them sells.
The IRS looks at a combination of factors to determine principal residence: where you spend the majority of your time, where you are registered to vote, your mailing address, state tax filings, and other indicators. It isn’t simply a matter of declaring one property your primary home. If you are considering a sale and own multiple properties, this is a conversation worth having with your tax advisor before you list.
Your Basis May Be Higher Than You Think
Capital improvements made while you owned the home (renovations, additions, new systems) can be added to your cost basis. A higher basis means less taxable gain when you sell. Over a long ownership period, those numbers add up. Good recordkeeping over the life of ownership pays off here, and if your records are incomplete, it is worth reconstructing what you can before you close.
What Falls Above the Exclusion
For a property that has appreciated significantly, the exclusion covers only so much. Gain above the threshold is taxable as a long-term capital gain, and depending on your overall income picture in that year, it may also be subject to the 3.8% net investment income tax. That combination can make the effective rate on the excess gain higher than it first appears.
Timing matters here too. If you have flexibility on when you close, the tax year in which the sale falls and how it interacts with other income events is worth modeling before you commit to a date.
The 1031 Exchange
A 1031 exchange allows you to defer capital gains taxes on the sale of investment property by reinvesting the proceeds into a like-kind property. To take advantage of it, you have 45 days from the sale to identify a replacement property and 180 days to close on it. This tool applies to investment or rental property, not a principal residence, which is what the gain exclusion discussed earlier is designed for. If the home you are selling has been held for investment purposes, a 1031 exchange is worth exploring with your tax advisor. One important timing note: the exchange must be structured before the sale closes, so this is not a decision you can revisit after the fact.
Charitable Planning Before the Sale
If you are charitably inclined and the property has appreciated substantially, there may be planning opportunities worth exploring before you sell. Certain strategies allow you to support causes you care about while also reducing the taxable gain you recognize. These need to be structured before the sale is complete, so the time to have that conversation is early in the process.
The financial and tax implications of a home sale extend well beyond the closing table. If a sale is on your horizon, it may be worth connecting.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.