Will I Owe Taxes When I Sell My Brentwood Home?

This question usually reaches me about two weeks after someone has already decided to sell. That's late. Most of what decides your tax bill gets settled before escrow opens, not during it.

How much of my gain can I keep?

The IRS rule has two tests. You must have owned the home at least 24 months out of the five years ending on the sale date, and you must have lived in it as your main home at least 24 months out of those same five years. The two stretches don't have to match.

Pass both and you can exclude up to $250,000 of gain, or $500,000 on a joint return. You generally can't use it if you already excluded gain on another home within the two years before this sale.

One thing people miss: if you receive a Form 1099-S from the sale, you still report the sale on your return, even when the whole gain is excluded.

A long ownership is what pushes people past the limit. Say your adjusted basis is $300,000 and you net $780,000 after selling costs. That's a $480,000 gain.

One house, two outcomes

Same $480,000 gain, different filing status:

• Single seller: $250,000 excluded, $230,000 potentially taxable
• Married, filing jointly: $500,000 limit, $0 taxable

An illustration, not a forecast. Your basis and selling costs set the real number.

That gap is why I ask about filing status and purchase year in the first conversation, not the fifth.

Your receipts lower the gain

Your gain isn't sale price minus purchase price. It's what you net from the sale minus your adjusted basis, and basis is where sellers leave money on the table.

Improvements add to basis. The IRS lists things like an added bathroom, a deck, landscaping, a pool, a new roof, and new central air.

Repairs don't count. Painting and fixing leaks keep the house in good shape but don't raise your basis. Your commission and other selling costs help too, because they come off the amount you realize.

Those receipts are worth real dollars, but only if you can produce them. Start a folder now.

The California withholding nobody mentions

When you sell California real estate, escrow holds back 3 1/3% of the sales price and sends it to the Franchise Tax Board unless you qualify for an exemption. On an $800,000 sale, that's about $26,640. The money isn't gone. You claim it as a credit when you file your California return, but it doesn't arrive with your proceeds.

You stop it by certifying an exemption on FTB Form 593, and the FTB says it has to be submitted before the transaction closes. After that, money already withheld comes back only as a credit on that year's tax return.

For most homeowners, one of two lines applies. Line 1 covers a home that meets the same two-of-five-years principal residence test. Line 2 covers a home that was last used as your principal residence, even if you don't meet the two-year test. Either way, an exemption from withholding doesn't excuse you from filing a return and paying any tax you owe.

When a spouse has died

California is a community property state. When one spouse dies, the full fair market value of community property can become the basis of the entire home, including the survivor's half, which can erase most of the gain. How title was held changes that answer. A surviving spouse may also still use the $500,000 exclusion if the home sells within two years of the death and other conditions are met. Both are conversations for your CPA.

One more mix-up I hear: Prop 19 is about your property tax when you move. It does nothing about income tax on your gain. My full explainer on Prop 19 covers that side.

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When the tax side is sorted and you want to talk about the house itself, bring me your closing statement from when you bought, your improvement receipts, a copy of your deed, and a rough sale date. I'll tell you what Form 593 will ask of you and which line you likely qualify for. Reach me at (925) 200-0717. I pick up my own phone.

This post is general information, not legal or tax advice. Your outcome depends on your filing status, how title is vested, your adjusted basis, and the timing of the sale. Talk with a CPA or tax attorney, and an estate attorney where a trust or a late spouse is involved, before acting on it.

Margie Lupo, Broker Associate, SRES® · eXp Realty of Northern California, Inc. · DRE #01193496 · Brokerage DRE #02188495 · Equal Housing Opportunity

Sources

• IRS Topic no. 701, Sale of your home — the exclusion and its two tests
• IRS Publication 523, Selling Your Home — basis, improvements, surviving spouses
• FTB Form 593 instructions — California withholding and exemptions