There are different types of taxes to consider when selling a home, such as capital gains tax, property tax and real estate transfer tax. Depending on your situation, you may qualify for some exemptions or special rules that can reduce or eliminate your tax liability. In this article we’ll explain what those taxes are and what you can do about it.
Capital Gains Tax
Capital gains tax is the tax you pay on the difference between the selling price and the adjusted basis of your home. The adjusted basis is the original cost of your home plus any improvements or additions you made over the years. To qualify for the capital gains tax exclusion, you must have owned and lived in the home as your primary residence for at least two of the last five years before the sale. You also cannot have claimed another exclusion within the last two years. If you meet these criteria, you can exclude up to $250,000 of profit if you are single, or up to $500,000 if you are married and file jointly. If your profit is higher than these amounts, or if you don’t qualify for the exclusion, you will have to pay capital gains tax at a rate that depends on your income level and how long you owned the home. The rates range from 0% to 20% for long-term capital gains (more than one year of ownership), and from 10% to 37% for short-term capital gains (less than one year of ownership).
Real Property Tax
Property tax is the tax you pay to your local government based on the assessed value of your home. When you sell your home, you and the buyer will usually split the property tax bill based on the closing date of the sale. For example, if you sell your home on June 30 and the property tax bill for the year is $1,200, you will pay $600 for the first half of the year and the buyer will pay $600 for the second half of the year. This way, each party pays for the time they owned the home.
Real Estate Transfer Tax
Real estate transfer tax is a tax that is charged by some states or cities when a property changes hands. The transfer tax rate varies widely by location, and some places have no transfer tax at all. The transfer tax is usually calculated as a percentage of the sale price of the home. For example, if you sell your home for $300,000 in a city that has a 1% transfer tax rate, you will pay $3,000 in transfer tax. Sometimes, the seller pays the entire transfer tax, sometimes the buyer pays it, and sometimes they split it. This depends on the local custom and the negotiation between the parties.
Special Circumstances on Taxes
There are also some special circumstances that can affect your taxes when selling a home. An example of these are:
If you inherited the home from someone who died, your basis in the home is usually its fair market value at the time of death, not what the person paid for it. This can reduce your capital gains when you sell it.
If you got divorced and transferred the home to your ex-spouse as part of a settlement agreement, you can use their ownership and use periods to qualify for the capital gains tax exclusion if they sell it later.
If you had to move away from your home because of work or health reasons, and you didn’t meet the two-year residency requirement for the capital gains tax exclusion, you may be able to claim a partial exclusion based on how long you lived there.
If you sold your home at a loss, meaning that its selling price was lower than its adjusted basis, you cannot deduct the loss from your income taxes. However, if you sold a rental property or a second home at a loss, you may be able to deduct it as a capital loss.
Keep it Foxy,
Sales Manager & Founder