taxes on sold house in Maryland

[remote teacher]

I live in Maryland.

I owned a house for 20 years, it was sold in August, 2020.

I have been told by some, taxes must be paid because the sale was income.

However. others have told me that I do not have to pay taxes as I lived in the house for 20 years.

And still, others are telling me, I don't pay State taxes, but I do pay Federal taxes.

So, my question, what, and to who, if any, do I pay?

 

[Just Blue]

@Taxing Matters

 

[Taxing Matters]

I live in Maryland.

I owned a house for 20 years, it was sold in August, 2020.

I have been told by some, taxes must be paid because the sale was income.

However. others have told me that I do not have to pay taxes as I lived in the house for 20 years.

And still, others are telling me, I don't pay State taxes, but I do pay Federal taxes.

So, my question, what, and to who, if any, do I pay?

The sale of the house is a taxable event for federal and Maryland income tax. Under federal tax law, however, if you are filing a return as single you may exclude up to $250,000 of the gain assuming you lived in that home as your principal residence for at least 2 of five years before you sold it. See IRS publication 523 for the details. So, if the gain you had was less than $250,000 you'd pay no tax on the gain, but would report the sale on the return. It appears Maryland also applies a similar exemption.

 

[LdiJ]

I live in Maryland.

I owned a house for 20 years, it was sold in August, 2020.

I have been told by some, taxes must be paid because the sale was income.

However. others have told me that I do not have to pay taxes as I lived in the house for 20 years.

And still, others are telling me, I don't pay State taxes, but I do pay Federal taxes.

So, my question, what, and to who, if any, do I pay?

When did you live in the home? From what date to what date? How much did you pay for the home and how much did you sell it for? Whether or not you will owe any tax depends on the answer to those questions.

 

[FlyingRon]

As others have tried to elicit, it depends a lot on whether you lived in the house on the date of sale as well as how it was used for the preceding five years to the sale. TM mentions the federal 250,000 (which goes up to 500,000 if married) exclusion. Maryland has the same exemption, though they have some specific additional rules if you were an out of state resident when it was sold. Also not mentioned is that there's some pro-rata reductions in that benefit now if there was non-conforming use (e.g., rental) during the five years.

One thing glossed over in the previous posts is that you're only subject to tax on the CAPITAL GAIN (TM mentions this but doesn't define it) not the entire sales price. The capital gain is the difference between the sales price (less certain selling expenses) and your basis (primarily what you originally paid for the house, plus any capital improvements made over the years).

So let's say you did live in the house for twenty years as your principal residence and sold it. If you bought it for $100,000, and ten years ago you put in new windows for $20,000, and you netted it for $370,000 (after the real estate commissions, etc...), Your basis is $120,000, and your gain is that subtracted from the net sale, yielding $250,000. You have $250,000 of exclusion so you have no federal or state tax liability.

If you ever resided elsewhere or if you rented the house out, that makes things murkier, and it would behoove you to talk to a tax professional.

 

[remote teacher]

I live in Maryland.

I owned a house for 20 years, it was sold in August, 2020.

I have been told by some, taxes must be paid because the sale was income.

However. others have told me that I do not have to pay taxes as I lived in the house for 20 years.

And still, others are telling me, I don't pay State taxes, but I do pay Federal taxes.

So, my question, what, and to who, if any, do I pay?

Also, if I don’t have to pay taxes bc there was not a capitol gain of $250,000 or more, do I have to buy a new house within 2 years after the sale of my house that I sold?Can that money be used for anything I want or does it strictly have to be used to buy a new house?

 

[remote teacher]

Also, if I don’t have to pay taxes bc there was not a capitol gain of $250,000 or more, do I have to buy a new house within 2 years after the sale of my house that I sold?Can that money be used for anything I want or does it strictly have to be used to buy a new house?

 

[Taxing Matters]

Also, if I don’t have to pay taxes bc there was not a capitol gain of $250,000 or more, do I have to buy a new house within 2 years after the sale of my house that I sold?

No, you don't have to buy a new home within 2 years (or ever) to get that $250,000 exemption. You can use the sales proceeds for any legal purpose you want. The $250,000 exemption replaced the old rule that existed prior to 1997 in which you could defer gain on the sale of your home if within 2 years you bought a new home for at least as much as you sold the old one for. The new $250,000 exemption rule is much more favorable to homeowners than that old gain deferral system was.