How Does Selling a House Affect Taxes?
No matter how much you may love your home, the time will likely come when you’re ready to move on. Whether you’ll need to move for work, to upsize or downsize, or simply to change neighborhoods, moving is just a fact of life.
The average American moves up to twelve times in their lifetime, after all.
If you’re selling your home in the near future, there’s a lot to keep on top of. One thing you won’t want to overlook is Uncle Sam. How does selling a house affect taxes? It’s important to know how your sale will impact your tax return before signing on any sort of dotted line.
What do you need to understand about home selling and real estate taxes? Read on and we’ll walk you through the basics of it all.
Do You Pay Taxes on a Home Sale?
If you put your house on the market and have offers roll in, your goal is to have offers on the table that would be higher than what you paid for the home. That’s the ideal for every home seller, whether you work with companies that buy houses or with individual buyers.
However, the thought may cross your mind: do you need to give some of this profit to the IRS? How much might you need to pay in real estate taxes?
The answer isn’t a clear yes or no. While property ownership sometimes may be privy to a capital gains tax, there are many loopholes and exclusions built into our country’s tax laws to benefit homeowners.
The most well-known of these loopholes is the home sale gain exclusion. It’s also sometimes referred to in tax laws as the primary residence exclusion. Under these exclusions, home sellers can exclude up to $250,000 from their taxes.
Married couples that are filing a joint tax return can double that total when they sell their home. That means up to $500,000 can be excluded from the next tax return.
For many homeowners, this can mean the entire profit they make on the home will end up being tax-free. In this sense, it is possible to sell a home and not have to pay any taxes at all. It all depends on how much the sale of your property is for.
Requirements for Elligbility
In order to enjoy this big exclusion, homeowners must meet a number of eligibility requirements. The biggest requirement has to do with residency.
In order to qualify, the home in question must have been your primary residence for at least two of the past two years. You also can’t have claimed the same exclusion on another home within the same two-year period.
This means that if you’re selling an additional rental property, as opposed to your primary home, you might not be able to enjoy this exclusion. However, if you’re simply selling your own home and moving to another one, you’ll be a primary candidate.
The net profit that you make is also calculated in a specific way you’ll want to get familiar with. When you calculate the ‘cost’ of the property, you can include a lot more than just the asking price that you paid some years ago.
This cost can also include all closing fees and associated costs, as well as the price of any upgrades, repairs, and additions you made to the home.
Your profits on the home can also be thought of in the same way. If you sold your house for a large total but paid 20% to a real estate agent, you only have to count the 80% you took home as part of your net profit.
This all works to your benefit, making it more likely your profit totals will fall under that $500,000 limit.
What If Your Profit is Larger?
What if you sell a house and you end up with a profit margin that is larger than the exclusion? Then you might actually need to pay up to the federal government. This is where things can get a bit complicated.
The most important thing to note is that only the amount you make above the threshold will be taxed. Your $500,000 exclusion will remain in place even if you do end up going above that limit.
For example, if you sold your home for $600,000 net profit, only $100,000 would actually be taxed by the federal government.
Capital gains taxes work in different ways, varying depending on how long you’ve owned your property. Short-term capital gains refer to property that has been owned for a year or less. Long-term capital gains refer to all property owned for longer than a year.
Long-term capital gains are taxed more favorably by the government, usually at increments of 0%, 15%, and 20% depending on your income tax bracket. The higher your tax bracket, the more you’ll need to pay for this sale.
The tax total that you owe for the sale of the home is due on the return following the sale of the home. For example, if a sale on a home closed in the summer of 2022, taxes on that sale would be due the following April, in 2023.
You can always send in your total to the government earlier, so as not to complicate your personal accounting over the course of the year.
How Does Selling a House Affect Taxes?
If you’re selling a house in the near future, it’s essential that you take the time to stop and understand how this sale might impact your overall tax burden.
How does selling a house affect taxes?
There’s a lot to understand about this process, but the above information can provide you with all you need to know to get started.
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