There is a lot of advice online for people going from renting to buying their first home—or juggling buying and selling a house at the same time. But what about homeowners who are ready to say goodbye to homeownership? 

While it might seem like just selling a house is both simple and profitable, there’s more to consider than one might think. Sure, there’s no concern about the sale being contingent on purchasing a new home, or timing closing dates with a buyer. However, in some circumstances, ending up with a big check from the proceeds could result in unexpected tax implications. 

It’s important to understand how selling a house without buying a house works, and how a realtor from Berkshire Hathaway HomeServices Select Properties can help.

There are several reasons why someone may consider selling a house without buying a house.

• Older homeowners might be ready to downsize and enjoy the perks of having someone take over their home’s maintenance. Moving to an apartment or retirement community could be a good choice. 
• Younger home or condo owners could decide to return to apartment living if the costs of homeownership have become too much of a burden. 
• Those relocating to the St. Louis area (or leaving the region) might want to wait a while before deciding where to buy. 
• Renting can suit recent divorcees or empty nesters who are debating where to live in the next chapter of their lives.

All of these scenarios involve renting instead of owning one’s primary residence. But what about homeowners who end up with an “extra” house to sell? 

• Two homeowners moving in together will choose one’s house as their primary residence, leaving them with an “extra” house to sell.
• Someone inherits a home from a deceased relative. If they do not intend to move into the house, they will put it on the market.

Just selling a house in these situations is common. Owners could of course decide to keep a house and rent it out, but not everyone is interested in becoming a landlord. 

One big plus of selling a house without buying a house is avoiding much of the stress that sellers experience. 

The recent hot housing market saw many house hunters frustrated as houses sold so fast that their offers kept falling through. Just selling a house and not worrying about finding a new one eliminates the anxiety that goes along with that contingency. There is also no need to synchronize the closing date to accommodate both buyer's and seller’s moving schedules.

And when sellers do not immediately need money from the sale, it gives them a great deal of negotiating power. They can take their time, holding out for the highest possible offer, possibly well above the list price. 

If it is financially feasible, the seller can move out of the house into their rental unit or new partner’s home before putting the property on the market. This makes it much easier for the realtor to stage and show the house to potential buyers.

Selling a house without buying a house can provide a windfall of cash to the seller. However, the seller could be in for a rude awakening at tax time depending on the circumstances and the amount of profit. 

This is due to capital gains. Capital gains result when a capital asset (like stocks, bonds, cars, or a house) sells for more than its purchase price. While most capital gains are subject to tax liability, selling a house is a bit different. If homeowners meet certain IRS requirements, they could be exempt from having to report or pay tax on the profit.

How Capital Gains are Calculated

Calculating capital gains begins with the purchase price of the house and adds any significant capital improvements (such as a new roof or major renovation). The result is called the cost basis. The sales price (less what’s owed on the mortgage and selling costs) is subtracted from the cost basis, resulting in capital gains on the sale. 

For example: A home was purchased as a primary residence ten years ago for $100,000. Over the decade, $25,000 was spent on improvements. Added together this gives a cost basis of $125,000 ($100,000 + $25,000 = $125,000). 

The homeowner decides to sell the house for $275,000. Selling costs are $10,000 and the mortgage balance is $35,000. The seller receives $230,000 ($275,000 - $10,000 - $35,000 = $230,000).

Capital gains on this sale are $105,000. 

Capital Gains Exclusions

Without buying a new home, the seller can pocket the $105,000 in the above example, without owing any tax. The amount is not taxable and does not even need to be included on the tax return due to a capital gains exclusion. The Taxpayer Relief Act of 1997 excludes capital gains of up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly, as long as the homeowners meet certain requirements:

• The seller must have owned the home for at least two years prior to the sale.
• The home must be the seller’s primary residence for at least two of the prior five years (although those two years do not have to be consecutive).
• The homeowner can only claim an exemption for capital gains from a home sale once every two years.

These rules protect all but the most profitable home sales from liability. Consider instead if the same house nets $285,000 instead of $105,000 for the seller. If the seller is single, they would be responsible for paying tax on capital gains of $35,000 ($285,000 - $250,000 exclusion = $35,000). 

Those selling an inherited home or any house where they did not live (or haven’t lived long enough) could owe tax on a portion or the entire amount of the sale’s proceeds. The exact amount of liability depends on several factors and IRS calculations spelled out in the Taxpayers Relief Act.

Avoiding Capital Gains Tax

As with most tax laws, the rules regarding capital gains on home sales are complex and there are many exceptions. Sales as part of a divorce settlement for example, or resulting from the death of a spouse, or other unforeseeable events have special rules that can change the eligibility for a full or partial exclusion.

Inherited property can avoid some tax liability by using a provision the IRS calls a stepped-up basis. This re-calculates the basis of the home as of the date of inheritance, rather than the date of purchase. For example, inheriting your grandmother’s bungalow purchased 70 years ago for a fraction of what it is worth today could result in significant capital gains. By recalculating its basis to its current value, the capital gains will be much less.

While the chance of owing tax on capital gains is more likely for someone selling an expensive luxury home where the profit is greater than $250,000 or $500,000 (depending on their marital status), it is something that all sellers should understand. Every year the IRS changes certain tax laws, rates, and taxable amounts. It is best to talk to an accountant or financial advisor or go to the IRS website, to learn how a transaction like selling a house without buying a house will affect tax liability.

If you are considering just selling a house, enlisting the help of an experienced agent from Berkshire Hathaway HomeServices Select Properties is a good idea. Not only can they guide you through the selling process and get you the best offer, but they will also be able to help you through the successful, stress-free transition from homeownership to wherever your future takes you.

Cover image by Andrii Yalanskyi by Getty Images by Canva.com