Selling your home is a significant decision that many homeowners make daily. Before you can focus on moving on from your old house into a new one, you will need to consider the tax implications of selling a house.
You must be aware of tax breaks and exclusions so that you aren’t caught off guard when it comes time to sell the house. There is no need to worry, though; we went ahead and curated this guide to help you understand the tax implications associated with selling your home. Continue reading below to learn more about the tax effect of selling a house and who you can reach out to for more information.
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Do I pay taxes on selling my house?
When you sell your home, you may need to pay taxes on money earned from the sale. However, some exceptions may result in you paying very little or nothing at all in taxes.
For example, if you have lived in the house for two of the five years before you sell the home, then the first $250,000 of any sale profit is tax-free. That tax-free amount increases to $500,000 if you are married and file a joint tax return with your spouse.
The tax you pay is based on the net amount after expenses that you gain from the sale. This is called the exclusion of capital gains.
So, this does not mean that the total amount of money you make from the sale, but instead, it is the difference between the sale price and the original purchase price.
Tax effect of selling a home
To figure out the tax effect of selling a house, you will need to calculate the profit you made from selling your house. This calculation is not as simple as subtracting the original price of your house from the sale price.
You will first need to figure out the cost basis of your home. It would be best if you considered the original price of your home in addition to any home improvements or additions. For example, if your original purchase price was $200,000 and you spent $20,000 in upgrades, you have a cost basis of $220,000.
You need to take the amount you sold the house for and then subtract any fees from that amount. For example, if you sold the house for $300,000 but paid $10,000 in fees, the total amount you earned is $290,000.
At this point, you can now subtract your cost basis from the amount of money earned from the sale. In this example, that is $290,000 minus $200,000, which leaves you with a profit of $70,000. Because your profit was less than $250,000, you do not need to pay any taxes for the sale of your house.
Tax implications of selling a house
You need to be aware of some other tax implications of selling a house. For example, let’s say that you were able to receive a profit of more than $250,000 from selling your home. In this case, you will need to be aware of larger capital gains.
Larger capital gains
As mentioned earlier, if you make a sale under $250,000 (or under $500,00 if you file jointly with your spouse), then you do not have to pay taxes on your profits. Any gain that does not qualify for the exclusion of capital gains is subject to taxation.
This means that the profit received from selling your home will be taxed at a long-term capital gains rate, provided that you owned the house for at least one year. If you did not, the IRS would instead consider this short term, and you are subject to the standard ordinary-income tax rate. The ordinary income tax rate can be more than double your long-term tax rate.
Keep track of your basis
It is imperative that you keep track of your tax basis. To do this, you will need to maintain thorough records of any improvements, additions, and the original purchase price of your home. You will also want to keep track of any casualty losses and depreciation claims based on business use.
Deducting a loss
It is imperative to note that you cannot deduct a loss. It is generally not deductible if you sell your home at a loss. If you use part of your home exclusively for business or rent out a part of your house, the loss attribute may be deductible.
If you are selling a second home, such as a summer home or vacation home, be aware that it is not eligible for the capital gain exclusion. If the property does qualify as a rental property, you may be able to consider it as a business asset which you can then use to deter tax on any gains through a Section 1031 exchange or installment sale.
You may be able to deduct a loss. To be sure, make sure that you reach out to a tax professional to see what your options are.
How to avoid capital gains tax
To avoid capital gains tax, you must live in the house for at least two years. You don’t have to live in the home for two consecutive years. If you sell a home that you have not lived in for at least two years, the gains on the sale are subject to taxation.
Check out your qualifications
It is best if you see what exceptions you may qualify for to avoid capital gains tax. For example, if you have to sell your home because of an “unforeseeable event” outlined by the IRS, you could possibly exclude a portion of your capital gains tax.
Keep your receipts
As mentioned above, the cost basis of your house generally includes the original purchase price in addition to the improvements made to the home over the years. When you have a higher cost basis, your exposure to capital gains is lower.
If you updated your air conditioning unit, updated the driveway, or put in new windows, those updates could cut your capital gains tax. Make sure to keep your receipts and share them with your tax advisor to see what you can use to help minimize your capital gains tax.
Real estate taxes
The local and state governments levy real estate taxes on real properties, such as your home, and these collected taxes help pay for schools, public services, projects, and more. Real estate taxes are ad valorem taxes which means the taxes assessed against the value of your house and the land that it sits on.
These real estate taxes are not assessed on the cost basis. You can calculate the real estate tax by multiplying the tax rate by the assessed value of your home. The tax rates vary across different jurisdictions, and they change.
Reporting the home sale
In general, you only need to report your home sale on your tax return if you turned a profit of $250,000 if you are a single filer. If you are a joint filer, you only need to report the home sale if it was over $500,000.
If you sold your home for more than the threshold, then you can exclude the first $250,000 or $500,000 of the profit you made on the sale. However, if you did receive a Form 1099-S, you must report the sale of your home, even if the profit you made is excludable.
Vacation home vs. primary home
The capital gains exclusion only applies to primary residences. It is important to keep that in mind when selling your property. If it is your primary home and you’ve lived in the house for at least two years, there should be no issues with the capital gains exclusion. Of course, to be sure, make sure that you reach out to your tax advisor so that you do not receive any unnecessary fees or penalties.
Any profit made from selling your vacation home or rental property can be taxed entirely. If you move into your vacation home and live there for about two years before selling it, you may be able to use the tax exclusion. It is important to note that your rental property cannot evade the tax.
Per the IRS, if you decide to move into your rental property, you must live there for five years before considering it your primary residence. At that point, you can then sell the home, and you may be eligible for the capital gains exclusion. Again, it is best to reach out to your tax advisor for more information to ensure you do not miss out on any tax exclusions.
When are the taxes due?
When selling your home, you should pay the capital gains tax in the quarter you sold the property. For example, if you sold your property in February, you should pay your taxes before the first quarter deadline, which is the 15th of April.
If you sold your home during the second quarter of the year, you would need to pay taxes by the 15th of June. For the third quarter, the deadline is the 15th of September, and for the fourth quarter, you must pay your taxes by the 15th of January of the following year.
Selling a home to an iBuyer
An iBuyer is a real estate company that uses algorithms and other high-quality technology to buy houses. When you sell your home to an iBuyer, you can receive an offer in about 24 to 48 hours instead of having to wait months for your home to sell in the current housing market.
How to sell to an iBuyer
Selling your home to an iBuyer is a relatively straightforward process. You won’t have to show your home to potential buyers or wait months for an offer to go through. Instead, you have to follow four simple steps.
1. Enter your home address
Before an iBuyer can extend an offer to you, they must do a valuation on your home. This valuation is free.
The iBuyer will pull data from your market area to generate the offer for your home. If your home meets the criteria of the iBuyer, you should receive an all-cash no-obligation offer on your home within 48 hours.
2. Review the offer
Depending on the iBuyer you decide to partner with, you may have five days or more to accept the offer. The valuations report should break down the value of your home, any transactions fees and closing costs, and the net proceeds that you will receive.
3. Schedule a free assessment
If you decide to move forward with the offer, you will need to have someone come to assess the house. The iBuyer will send their representative to look at the home to verify its condition.
If any repairs are needed, the iBuyer will deduct that from your net proceeds. They will handle the repairs after you move out of the home.
4. Choose your closing date
With repairs out of the way, you have the opportunity to choose your closing date. You have the option to move out within a few days, a couple of weeks, or two months.
The time you have to move out depends on your iBuying company, but for the most part, you have up to 60 days to close the deal. After you close the home sale, you will receive a payment within days.
Sell your home with ease
As you now know, there are many tax implications of selling a house that you must be aware of before you list your home. Selling your home can be an exciting yet daunting task to take on, especially if you want to move on to that next phase of your life quicker.
If you are ready to sell your home and receive an offer within 48 hours, submit your address for a free, no-obligation offer. Our team is also fully prepared to answer any questions or concerns you have about the selling process.