Q&A: Capital gains tax

Dear Liz: I am selling my house. After subtracting all selling costs, stepping up the basis for capital improvements over the years, and using the $500,000 capital gains exclusion from the IRS, I will still have a significant capital gains tax due. Does this tax need to be paid via the quarterly estimated tax in the quarter the house closes, or can I wait and pay the capital gains tax with the yearly tax filing?

Answer: If you are the sole owner of the home, then you can exclude up to $250,000 of capital gains from a home sale. If you’re married then the exclusion amount is doubled to $500,000.

Ours is a “pay as you go” tax system, which means you’re supposed to withhold the appropriate taxes as you earn or receive income. If you don’t withhold enough, you can owe penalties. People who don’t have regular paychecks or who experience windfalls, such as your home sale, may have to make quarterly estimated payments to ensure they’ve paid enough to avoid the penalties.

One way to avoid penalties is to make sure your 2022 withholding at least equals your 2021 tax bill, if your adjusted gross income is $150,000 or less. If your adjusted gross income is more than $150,000, your withholding needs to equal 110% of your 2021 tax bill. Another is to pay 90% of your 2022 tax bill. It’s tough to know what your tax bill is going to be before the year ends, though, so most people choose to withhold based on their 2021 tax bill. If your 2022 bill will significantly exceed your withholding, however, you’ll want to make sure you stash the appropriate cash in a safe, FDIC-insured savings account so it’s available when you have to pay Uncle Sam next year.

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  1. dear liz: My father passed away and left his house (only assest) to his 4 children, of which i am one. My sister, the executor, sold the house “as is” and will distribute the split amount. Will i have to pay capital gains tax based on 1/4 of the house “fair market value”? Will i be allowed to reduce gain by the upgrades I PAID for – windows and bathroom? And lastly, if house sold for less than FMV, must i report sale on my taxes (as a loss)? Thank you!!

    • Liz Weston says

      Typically, the house gets a new value on the date of your dad’s death. You’d only owe taxes on the growth in value between that date and the date of sale. If the house drops in value instead, that would be a capital loss you could use to offset other gains or up to $3,000 of income per year.