Selling a home is an exciting milestone for homeowners, but it is also a major financial transaction with several potential expenses and tax considerations. Having a great real estate professional by your side and understanding what to expect can help sellers navigate the process smoothly and avoid any surprises.
While selling your home can be profitable, it may also trigger tax obligations. The most significant tax consideration is the “capital gains tax,” which applies if you sell your home for more than you paid for it. The good news is the IRS offers an exclusion that helps many homeowners avoid some or all of this tax. If you’ve lived in the home as your primary residence for at least two of the past five years, you can exclude up to $250,000 of profit if you’re single, or up to $500,000 if you’re married and filing jointly.
If your profits exceed these limits, you may owe capital gains tax on the profit, which is typically 15-20% depending on your income bracket. I know you’re thinking: This is Lynchburg … our homes appreciate, but not that much! For most of us living in Lynchburg, we would not see this much increase in our real estate investment. You may have bought your home for $200,000 nine years ago, and then end up selling your home for $350,000 today. That is $150,000 of profit that you don’t have to pay taxes on, congratulations! However, what if you bought a fixer-upper 30 years ago for $100,000 and now are selling for $750.000; will you pay capital gains tax on your profits over the $500,000 limit (because you’re married)?
Amy Gallagher, a local CPA (who this past year generously shared her time and knowledge with the Lynchburg Association of Realtors during one of our monthly education sessions), explains there are situations where you may be able to offset that number. She says if you made any renovations to the home since you owned it, you would most likely be able to count that against the increased value of the home.
For instance, in the scenario above:
- Purchased in 1995 for $100,000
- Sold in 2024 for $750,000
- Major renovations in 2021 costing $175,000
Your “cost basis” (the adjusted purchase price) would increase from $100,000 to $275,000. That means your taxable profit would be $475,000, which falls under the $500,000 exemption – resulting in no capital gains tax owed.
Selling a home is more than just signing a contract – it requires planning, potential expenses and tax considerations. Consulting with your real estate professional as well as your tax professional can ensure you maximize your profits while staying prepared for any financial obligations that come with the sale.
Billy Morris
2025 president of the Lynchburg Association of Realtors
Associate Broker at John Stewart Walker Inc.