When selling a house, what would be better as far as getting the money back that was originally put down?

A) Pay the house off completely from the mortgage company (95K remaining), then sell
B) Sell house with $95K remaining?

About 5 years ago I bought my house for $150K. I have been making just normal monthly payments for the whole time and saving / investing what ever I have left over as far as savings go.
Since this will be my first home that I will be selling, I am currently looking into options as to what would be the best way to handle it.
Currently my two options are the ones listed above, this house would be sold to my parents for the exact price that I paid for it, so no profit would be made by me.

My very limited knowledge on the matter is 'Person A' sells the house, any outstanding debt to the mortgage company gets paid, what ever is left from the transaction is sent to the seller.

My second question is, at this point, going with Option B, would 150K-95K = $55K that comes back to me would that be all taxed on?

Or does it make more sense to pay the remaining balance on the house then to sell it? If I do go this route, does this mean the whole $150K would be taxable?

  • Assume you are in United States
    – Dheer
    Commented Jun 29, 2014 at 14:15
  • Yes state side.
    – Dan K
    Commented Jun 29, 2014 at 14:33
  • Where would the $95K come from? Is it in investments that might incur capital gains taxes when you sell to generate cash, or savings, or a mix of both?
    – Craig W
    Commented Jun 29, 2014 at 17:37

3 Answers 3


First the good news: based on the time involved, and the amount of potential profits; you will not owe any tax on the sale of the house no matter which option you pick.

Now the details.

When determining if there are any capital gains the IRS cares about the difference between the sale price and the purchase price. The amount of the loan, the final balance of the loan, or the lack of loan don't factor into the calculation. To complicate matters the government does factor into the equation any improvements you have made to the house (like a new deck) and the cost of buying and selling the house (real estate agents).

If a single person has less than 250K in capital gains and has used the house as their main residence for 2 of the the previous 5 years their tax is zero. For a couple the tax free gain is $500K.

For your situation since the sale price is less than $250K, the capital gains will also be less than $250K.

You do have one potential area of concern. If the house is worth significantly more than $150K, the government could claim that the difference between what you charged your parents and what you could have charged was a gift.

Assuming that there are no other factors that you didn't include in the original question it would appear that you will not face any taxes.

Regarding your two options, neither will impact the taxes. Though draining your savings or investments could make it difficult to meet an emergency during the time between the sending of the $95K to the mortgage company and the closing on the deal with your parents. If the money came from retirement account it could have an even greater impact on your taxes and retirement situation.

  • The majority of the remaining balance would come from the sale of stocks and savings that I have built over time. How much would be considered "significantly more"? Personally I think that selling my home to someone else, I might on high end get 170K, so a $20K difference.
    – Dan K
    Commented Jun 29, 2014 at 19:02
  • 1
    That wouldn't be a problem. The extra 20K would represent a 10K gift to one parent and a 10K gift to the other. Both under the 2014 gift tax level of $14K. Commented Jun 29, 2014 at 19:24
  • 6
    @DanK paying off your loan by selling stocks will trigger caital gains tax on the stocks. Paying off from the proceeds of selling the house will not trigger any additional tax (or any at all, as mhoran_psprep explained).
    – littleadv
    Commented Jun 29, 2014 at 19:29

The "easier" way is to sell the house, and pay back the 95K to the mortgage company. Your taxable gain (if any) is calculated as the difference between the sales price minus the purchased price of 150K. There is a further deduction for any selling expenses, before you have to pay income tax.

If you liquidate your other investments to raise the 95K and prepay the mortgage, you might realize, and be taxed on gains on **those ** investments. That's something you might not want.

On the other hand, if you have some investments that can be liquidated at a loss, you might want to sell those to generate a tax loss, then prepay all or part of the 95K. Bear in mind that there are limitations of 3K a year for certain types of losses. So see a tax adviser before using this course of action.

  • That would be a good way to reduce the gain on the sale of the house that is not excluded under Sec. 122 (if any). Then the 3K limit only applies after the reduction. However Sec. 122 exemption is before the gain/loss balancing.
    – littleadv
    Commented Jun 29, 2014 at 23:19
  • Is there any benefit from taking capital losses and using them toward your mortgage principal versus just taking capital losses?
    – Craig W
    Commented Jun 30, 2014 at 19:00

There should be no affect on your taxes. If you profit on the sale of a home, it does not matter whether you own the home fully or not.

Selling a house with a mortgage on it will usually incur fees, "like mortgage processing fees".

Paying off the mortgage is preferable because that will make the sale easier. When a bank is involved then they will function in the closing as a 3rd or 4th party, making everything more complicated. Not only that, they will charge you fees, for making them sit through a closing. The bank will require a lawyer. Guess who pays for their lawyer? You do.

When you pay off a mortgage, none of this happens. You just pay the mortgage and the bank goes away. There are no lawyers and no fees. This makes it easier to sell the house and gives you full control over the sale.

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