April 10, 2023

Is Money from the Sale of a House Considered Income?

Selling a house can be a stressful and exciting experience, but it's important to understand the financial implications of the sale. One common question that arises during this process is whether the money from the sale of a house is considered income. In this blog post, we'll explore this question and provide some clarity on the matter.

Understanding the Basics

Before diving into the specifics of whether money from the sale of a house is considered income, it's important to understand some basic terminology and concepts. Here are a few key terms to keep in mind:

  • Capital Gains: When you sell an asset, such as a house, for more than you paid for it, the profit is known as a capital gain. This gain is subject to taxes.
  • Basis: The basis of an asset is its original cost, plus any improvements you've made to it over time. The basis is used to calculate capital gains.
  • Exclusion: In some cases, you may be able to exclude some or all of the capital gains from the sale of your primary residence from your taxable income.

Let’s Dig a Little Deeper Into Capital Gains

Capital gains refer to the profits realized from the sale of an asset, such as stocks, real estate, or artwork. The capital gain is calculated as the difference between the purchase price of the asset and the price at which it is sold. Capital gains can be either short-term or long-term, depending on the length of time the asset is held.

Short-term capital gains apply to assets held for less than a year, while long-term capital gains apply to assets held for more than a year. In general, long-term capital gains are taxed at a lower rate than short-term capital gains.

Capital gains tax is the tax levied on the profits from the sale of an asset. The tax rate depends on several factors, including the type of asset sold, the length of time it was held, and the investor's income bracket.

In the case of real estate, capital gains tax may apply when a property is sold for a profit. However, there are certain exclusions and deductions available that can reduce or eliminate the tax liability. For example, homeowners who sell their primary residence may be able to exclude up to $250,000 of capital gains from their taxable income if they have owned and lived in the home for at least two of the past five years.

Is Money from the Sale of a House Considered Income?

The short answer to this question is no, money from the sale of a house is not considered income in most cases. However, there are a few important exceptions to this rule that you should be aware of.

Capital Gains Tax

If you sell your home for a profit, you may be subject to capital gains tax. This tax is based on the difference between the sale price and your basis in the property. However, there are some important exceptions to this tax that may apply to you:

  • Primary Residence Exclusion: If you've owned and lived in your home for at least two of the past five years, you may be able to exclude up to $250,000 of capital gains from your taxable income if you're single, or up to $500,000 if you're married filing jointly.
  • Reduced Exclusion: If you don't meet the two-year ownership and use requirement, you may still be able to exclude a portion of your capital gains if you sell your home due to certain unforeseen circumstances, such as a job loss or health issue.
  • 1031 Exchange: If you plan to reinvest the profits from the sale of your home into another investment property, you may be able to defer paying capital gains taxes through a 1031 exchange.

Rental Properties

If you sell a rental property, the money from the sale is generally considered income, since the property was held for investment purposes rather than as a primary residence. In this case, you'll need to pay taxes on any capital gains.

Inherited Property

If you inherit a property and sell it, you may be subject to capital gains tax based on the fair market value of the property at the time of inheritance, rather than the original purchase price.

In most cases, money from the sale of a house is not considered income. However, it's important to understand the nuances of capital gains tax and other tax implications when selling a property. If you're unsure about how the sale of your home will affect your taxes, it's a good idea to consult with a tax professional.

Sell My House Fast in Chicago, Illinois

If you need to sell your house fast but don’t want the hassle of a traditional home sale, contact Sherman Property Experts. We buy houses as-is. No repairs are needed. Avoid closing costs and realtor commissions. Close in as little as seven days. Call (773) 985-7703 to get cash for your home from our local home buyers in Illinois.

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