Question - I have to move to another state within the next year. After we sell our home here, the home we buy there will probably be less expensive than what we now own. Will we have to pay capital gains taxes? - C. S., Germantown, Tenn..
Answer - Generally, when you have a profit on the sale of your primary residence you must pay taxes on that gain, says Jerry Allison, a partner in the certified public accounting firm of Allison & Chumney. In some cases, that tax may be deferred or excluded, he says.
To figure out your possible tax liability, you must start with your cost basis in the house. Begin with the purchase price; add closing costs on both the purchase and sale as well as any money you spent on improvements such as fences, swimming pool, landscaping, patio or garage, Allison says. Repairs don't count as improvements.
Then, subtract that total from the selling price of your house. That will give you your gain.
For example, your cost basis in your house is $50,000 and you sold it for $100,000. Your gain is $50,000.
Next, says Allison, compare the price of your new home with the sale price of the old one. Say you paid $80,000 for your new house. That means you must pay tax on $20,000 of the gain - the amount you did not reinvest in your new home. Tax on the other $30,000 is deferred.
If you pay more than $100,000 for a new home, then tax on your entire gain would be deferred.