Yes, No, or Maybe? What You Need to Know About Taxes When You Sell a House
Selling your house is stressful. It costs a lot of money to sell, it takes a lot of time, and it has the potential to give you lots of headaches.
On top of that, there’s a good chance your favorite Uncle Sam is going to come knocking to take some of that money off your hands. No taxes aren’t reserved for your employment income and investments. There are also taxes when you sell a house, in some circumstances.
So what taxes do you pay when you sell a house? It all depends on your situation. Keep reading below to learn all about selling your home and tax implications.
What Is Capital Gains Tax?
The most important thing to understand is capital gains tax. Selling your home and capital gains tax often go hand in hand.
Capital gains tax is a tax charged to profits made on an investment. You usually hear about this tax in reference to the stock market or retirement accounts.
If you buy a stock for $100, and it increases in price to $150, you’ll pay tax on the $50 profit if and when you sell it. But you only pay tax on the profit once it’s sold and profit collected, not when the value increases.
So if you never sell, you don’t need to pay taxes.
Capital gains tax is broken up into two categories; short-term and long-term. Long-term taxes are generally lower. This applies to an asset when you hold it longer than one year.
Depending on your annual income level, long-term capital gains tax rates are 0%, 15%, or 20%.
Short-term capital gains tax is paid on assets held for under a year and is taxed at the same rate as your income.
But do you pay taxes when you sell a house? Houses can be an investment, but they aren’t always an investment vehicle.
Do You Pay Taxes When You Sell a House?
The short answer is yes. But the longer answer is probably not.
Because houses appreciate in value, the profit generated from sales is considered investment profits. These profits are subject to the same capital gains tax rates listed above.
However, there are exemptions in place. For those who are single selling a house, they may be able to take up to $250,000 in profit without paying any tax. Any amount above the $250,000 exemption in profit would be subject to capital gains tax.
If you are married filing jointly, this exemption increases to $500,000.
But you can only claim this exemption if you have lived in the property for at least two years out of the last five years. So if you live in it for two years, moved out, and rented it out for three years, you would still qualify.
And you can only claim this exemption once every two years. SO if you own multiple properties, you can’t sell both within the same two-year timespan and claim the exemption on each.
Since most homeowners live in their homes for more than two years, they will be able to qualify for the exemption. And since most homes don’t appreciate more than $250,000 in the span of a few years, most people don’t have to deal with taxes paid on profits above the exemption.
When to Pay Taxes on a Home Sale
So what happens if you want to sell your home after one year because the market is crazy and the value is through the roof? You would pay capital gains tax on the profit, not on the sale price.
Say you bought a house for $300,000. One year later, it’s worth $400,000. You sell the home to cash in on that sweet $100K. But then you remember Uncle Sam and all his rules.
You owe your long-term capital gains tax on that profit. If you’re single, making $60K per year, you would pay 15% or $15,000 in capital gains tax.
If you’re married filing jointly, and your household income is $75,000, you would pay 0% since you’re in the lower income tax bracket. Check the IRS website to find out exactly how much you could expect to pay based on your income and filing status.
Avoiding Taxes on a Home Sale
So what if you’re an investor, or aspiring investor, looking to flip a home and purchase a new one with the profit? You can use a 1031 exchange to delay your tax payments.
A 1031 exchange is a clause in the IRS tax code that allows you to sell your property for a profit and use it to acquire a new property of equal or greater value.
You don’t have to pay capital gains tax upfront but are essentially rolling them over into the next property. If you continue buying, selling, and using a 1031 exchange, you could effectively defer tax payments indefinitely.
If you eventually sell and take profits, you would then need to pay your capital gains tax. Or, if you plan on leaving the property to your heirs, your tax burden would die with you, allowing them to enjoy the assets without needing to backpay your taxes.
Making the Sales Process Easy
Whether you’ve been in a house for 10 years and don’t expect to pay any taxes, or have been in a home for 6 months, selling a house is never easy. It takes a lot of time, and lot of work to prepare the house for buyers, and a lot of paperwork and phone calls.
If you’re ready to cash out of your home and move on right away, content your local cash home buyer. Every city has buyers who will buy on the spot, with cash, as is. It makes the process super simple so you can move on with your life stress-free.
For example, if you’re in the Boise area, check out ibuyhousesboise.com. Any medium to large town or city will have buyers ready to make an offer today.
Always Plan Ahead
Selling a home isn’t a fun process. But cashing in on your equity thanks to an appreciating real estate market is very fun. That is until the IRS steps in.
Luckily, it’s easy for most people to avoid most, if not all, capital gains taxes when you sell a house. Just understand the exemption requirements ahead of time, and always think long-term when making a major purchase or investment.
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