How will I be taxed on the money from the sale of my house?
While waiting to sell my current home, I would like to take $90,000 from my savings and use it as the 20 percent down on a new home. Once my old home sells, I would like to pay myself back the $90,000. How will I be taxed on the money from the sale of my house?
If the house you are selling has been your primary residence two out of the last five years, you will have $250,000 capital gains tax free if you are single and $500,000 capital gains tax free if you are married.
In determining how to calculate your capital gain exposure, you will take what you paid for the house, add the cost of any improvements to determine your cost basis. So for example, if you paid $200,000 for your home and you improved it with new windows, new bathroom(s), kitchen or any other qualified improvements that cost $100,000 over the time you have resided in your home, your cost base would be $300,000. Let's say you sold your home for $450,000. That price would be $150,000 of capital gains. That number is less than the allowed amount of $250,000 as a single person or $500,000 as a married person, so you would owe no taxes. If it sold for $600,000, the capital gains would be $300,000. You would have $300,000 minus $250,000 (as a single person) = $50,000 for your capital gains exposure. If you were married, again the $300,000 gain is less than the $500,000 so there would be no capital gains exposure. If you have resided in the home less than two out of the five years, any gain over the cost basis is exposed to capital gains. You may consider consulting your accountant to determine the exact gain exposure if any.
If you are single, the first $250,000 of profit will not be taxed, as long as the home has been your principal residence for at least two of the past five years. If you are married, the exemption doubles to $500,000. Any profit beyond the exemption is taxed as a long term capital gain. Please make sure you have included all capital improvements in your cost basis. For example, if you paid $600,000 for the house ten years ago and did $150,000 in additions and/or upgrades, your cost would be $750,000.
However, you may have to pay capital gains tax on any investments you sell in order to raise the $90,000. If this is the case, you might want to consider a bridge loan instead. You don't say how your savings are invested, so we can't know for sure.
There is a good chance you will pay 0% in taxes on the sale of your home.
The tax code has a provision for the sale of your primary residence where you can shield profit from taxation, called the primary residence exclusion. If you have been living in the house for at least the past 2 years you can qualify to avoid taxation on the profit from your home, up to a total of $250,000 if you are single or $500,000 if you are married. The longer you've lived in the house, the closer to the full $250,000 ($500k married) you can shield. If you haven't lived in the house in the past two years, you may still shield some of the profit, but you will want to talk to a CPA or a tax-experienced financial advisor to get the details for your specific situation.
The profit on the sale of the home is calculated as the sale price minus the purchase price and minus sales commissions and other expenses. So, if you bought the home for $100,000; sold it for $225,000; and paid $25,000 in total sales commissions and fees, your profit would be $100,000.
Based on your question, you should be fine with the taxation. The only thing which might throw a wrench in the plan is if you wait too long to sell the current home. My guess, though, is you will be able to get it sold within the timeframe without problem. If you have a CPA or financial advisor, it could be worth sitting down with them for a few minutes just so you know your maximum timeline.
The following is the IRS publication which explains the exclusion. https://www.irs.gov/publications/p523
If you've lived in the house 2 out of the last 5 years, $250,000 over what you paid is tax free. If the house is in the name of you and a spouse and you've both lived there, $250,000 per person ($500,000) over the original price you paid will be tax free to you.
So depending on how much it's appreciated, you could be gaining some money without paying any tax!
As long as you haved owned and lived in the house 2 out of the last 5 years, then your $90,000 would be tax free. The rules allow for up to $250,000 to be tax free in that case. You would then be able to replenish your savings at that point.