What counts as profit for the home selling tax exclusion?

As a single homeowner I know that $250,000 of the profit I would make from selling my home is tax exempt, but I would definitely be making a higher profit than that. If I refinance my home so that I 'owe' more to pay off the mortgage and technically make less profit, then does that mean if I sell the house for 500k, but 'owe' 250k because of refinancing, that I have only made $250k profit and therefore that is exempt from taxes?

Asked by Lee Muth

3 Answers

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Answered by Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC
Hi Lee,

Refinancing your home to get the tax exemption instead of just selling it for a higher profit may not give you more profit. Why not just sell it for a lower amount? We will need to do a detailed CBA- cost benefit analysis for that.

If you receive a form 1099S with 250K or less (single), This should satisfy the $$ amount. Many folks have this sent directly to the IRS.

There are 3 tests: how long you have owned the home (ownership), what is it used for (use), have you previously taken this exclusion (timing), There are also special circumstances for divorce settlement, military, etc.,
https://www.irs.gov/pub/irs-pdf/p523.pdf

Do you have an offer on the home? Check with your tax advisor and/or contact us directly to discuss the particulars in greater detail. No obligation.

It's not what you make, It's what you keep that determines your lifestyle | 04.13.16 @ 16:03
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:30
L
Answered by Lee Muth
Thanks Dave. I get unsolicited letters every day from developers wanting to buy my house which would put me significantly over the 250k I can exclude from profit. I only owe less than than 100k on the house and would be making a profit above that of another 440-500k. As it is I feel it's unfair that as a single person I only get a 250k exclusion unlike a married couple who get 500k. I want to maximize my profit while also reducing the amount of profit I would be taxed on and saw refinancing as a way to do that. I would do a no fee refinance with my credit union and then pay off the higher mortgage balance when I sell in another year or two. As you said in your reply, it's not what you make, but what you keep! | 04.14.16 @ 05:35
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:30
Answered by Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC
Hey Lee.
Glad I was able to help.
Using you numbers of $440-500K profit. Subtract $250k = $190-250K. Multiply this by your tax rate? Bottom line is $250K + whatever you get after taxes.

With refinancing, a no fee is good. Look at the bottom number. What is the total cost of the higher mortgage? Also,, factor in any difference in payments and any other costs. Compare this to what you would get after taxes on selling the house at a profit over $250K without refinancing .

Keep me posted on our progress. Also, you mentioned that you may sell in 1-2 yrs. Will you be buying a new one and can both properties be held for use in a trade or business or for investment. ? If so, a like-kind exchange (Section 1031 of the tax code) may work for you. This is a transaction or series of transactions that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset. Check with your Real Estate Attorney on structuring this.
https://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031 | 04.14.16 @ 16:30
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:30
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