If Proceeds from the Sale of My Home Are Used to Pay Off My Mortgage, Are They Taxable?

According to the IRS, the answer is maybe. The amount of the proceeds from the sale of your home that you use to pay off the mortgage is not a factor in figuring your taxable amount for the sale. Instead, the amount you realize on the sale of your home and the adjusted basis of your home are important in determining whether you are subject to tax on the sale.

If the amount you realize, which generally includes any cash or other property you receive plus any of your indebtedness the buyer assumes or is otherwise paid off as part of the sale, less your selling expenses, is more than your adjusted basis in your home, you have a capital gain on the sale.

Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases. If you financed the purchase of the house by obtaining a mortgage, include the mortgage proceeds in determining your adjusted cost basis in your residence. You may be able to exclude from income all or a portion of the gain on your home sale. If you can exclude all the gain, you don't need to report the sale on your tax return, unless you received a Form 1099-S

The IRS has a handy publication known as Publication 523 to help taxpayers determine the amount of gain that may be excluded from income. If you do not want to read the publication, the professionals at The Center for Financial, Legal, and Tax Planning are more than knowledgeable with regards to the tax code and other aspects of real estate transactions. Please contact us at (618) 997-3436 with any questions.