How to Calculate Taxes on the Sale of Personal Residences

The primary home exclusion could reduce or eliminate the sales on the sale of your personal residence.

house image by Earl Robbins from

When you sell your home, taxes probably aren't on the front of your mind. However, if the value of your home has gone up, you could find yourself with a hefty tax bill. If you qualify the primary residence exclusion, you might be able to exclude all of the gain from your primary residence. To qualify for the primary residence exclusion, you must have owned the home and used it as your primary residence for two of the last five years.

Step 1

Calculate your proceeds from the sale by subtracting your selling expenses from the selling price. Selling expenses include real estate agent commissions and advertising commissions. For example, if the selling price is $990,000 but you paid $40,000 in expenses, your proceeds are $950,000.

Step 2

Calculate your basis in the home by adding the cost of any home improvements to the amount you paid for the home. For example, if you paid $300,000 for the home and spent $30,000 to add on a garage, your basis would be $330,000.

Step 3

Subtract your basis from your proceeds to calculate your gain on the sale of your personal residence. In this example, subtract $330,000 from $950,000 to find your gain equals $620,000.

Step 4

Subtract your primary residence exclusion from the taxable gain. The exclusion is generally $250,000, but if you're married filing jointly, you can exclude up to $500,000 of the gain. For a married couple to qualify for the larger exclusion, the couple must file a joint return, one spouse must meet the ownership test, both spouses must meet the use test, and neither spouse can have used the exclusion within the past two years. Continuing the example, if you qualify for a $500,000 exclusion, subtract $500,000 from $620,000 to find your taxable gain is $120,000.

Step 5

Calculate the taxes on your home by multiplying the taxable gain by the appropriate tax rate. If you've held your home for more than one year, you'll pay the lower capital gains rate. If you haven't held your home for at least one year, the income is taxed at ordinary income tax rates. Finishing the example, if you've owned your home for 10 years and the maximum long-term capital gains rate is 15 percent, multiply $120,000 by 15 percent to calculate the taxes to be $18,000.