Financial Solutions of California
2725 E. Pacific Coast Highway
Suite 102
Signal Hill, CA 90755

If you do not qualify for the homeowner’s capital gains tax exemption upon the sale of a property, then you must pay capital gains and income taxes to the IRS and California FTB on the profit from the sale. Many homeowners are in the dark as to how this profit is calculated.

The single biggest mistake people make is believing that the mortgage on the property has anything to do with their profit on the deal. It boils down to how much you paid for the property and how much you sold it for. If you bought a house for $100,000 (including closing costs) and sold it for $500,000 (after paying commissions and expenses) then your profit is $400,000. But what if you owe $500,000, so you took home nothing? Well, that means that along the way, you borrowed money against the house and, presumably, spent it on whatever you desired.

The IRS considers that you have already pulled out your profit and even though none of that money may be left anymore, you will get hit with a tax bill on $400,000 in profits. That could be a very large five figure tax bill or more. Knowing this ahead of time, might make you choose a different route with that property.

If you sold a property for less than the amount owed and yet had a big profit compared to the purchase price, you could end up owing income tax on the debt forgiveness from the bank as well as capital gains tax on the profit you spent long ago.

In short, always call your tax advisor prior to signing a listing agreement!