Key Tax Laws To Know if You Sold Your House in 2022
If you were on the move in 2022 (or plan to be in 2023), there are some home sale tax rules you may want to unpack. Primarily, these rules relate to capital gains and losses — and how to report them on tax returns.
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According to real estate portal Redfin, the pendulum swung drastically on home sale values in 2022. Total values were up 6.5% in December 2022 versus the same time period in 2021, but it was a marginal increase as values plummeted in the second quarter of the year. Estimates of total home value across the country was $45.3 trillion by the end of 2022, down from a record high of $47.7 trillion in June. That six-month drop represented the largest reported since the crash of 2008.
With so much fluctuation, gains and losses on home values have become a big topic of conversation for 2022 tax filings. As Forbes noted, “Some taxpayers believe that any profit on the sale of a home is taxable — but that’s not true.”
A profit of $250,000 for individual homeowners, or $500,000 for married homeowners filing their taxes jointly, is the threshold before it’s considered a taxable capital gain. This is referred to as the maximum exclusion by the IRS. Two other major qualifiers are also important to note: It must be the sale of your main home (if you have multiple properties) and you must have owned and lived in the property for at least two of the five years before the sale happened.
Furthermore, added Forbes, “There’s no rule that says what you have to do with the proceeds.” So you don’t have to use the money for a new home, as many believe.
Calculating Capital Gains When Selling Your House
When it comes to determining what your gain was, that becomes a bit more nuanced. First, you’ll need to start with the price you originally paid for your home (called the “basis”). But if you made substantial home improvements that added value to the home — such as an addition increasing the square footage — that adds to your original basis. Make sure to keep strict records and receipts related to the work for verification purposes. As an example, then: If you bought a home for $400,000 and added $100,000 in improvements, your basis would be $500,000.
When it comes time to sell your home, your capital gain is the amount you sold it for (presuming it was profitable) above your cost basis. Using the same example: If you sold your house for $650,000, but had a cost basis of $500,000, your capital gain would be $150,000. That gain would be below the taxable threshold, married or single. If, however you sold the home for $800,000 — and you’re filing as an individual — your gain would be $300,000, and capital gains taxes would apply.
Depending on if you lived in the home for a short or long period of time, different tax rates would apply. Per Forbes, if you lived there under a year, your normal income tax rate would be applied to any gains. But if you lived there for longer than 12 months, long-term capital gain rates would be applied when called for. For 2022, those long-term rates could be 0%, 15%, or 20%, dependent upon your personal income tax rate.
If you made a loss on the sale of your home, selling it for less than the original basis, there would be no negative tax implications but, as Forbes noted, you also can’t claim a loss for a personal residence.
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Of course, there are always exceptions to any tax rule and the IRS has put together a helpful guide to determining what applies to your unique situation. Partial exclusions do exist, primarily for moves made out of medical necessity, for work-related reasons, and sales surrounding certain unforeseen circumstances.
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