Do I Have to Pay Taxes When I Sell My House?

Selling Your House

There’s a lot that goes into the decision to sell your house, and we here at Sell Your House Fast – Kansas City understand that. The costs of selling can be high, so it’s natural to wonder if you will owe taxes. The term capital gains tax basically means the taxes on profits you earn when you sell a capital asset. Capital assets are any kind of property worth money, so when talking real estate, this can include land, investment properties, a vacation home, primary residence, etc. So whether you have to pay capital gains taxes or not really matters! 

Capital Gains Tax

Whether you will pay capital gains tax on the sale of your home depends on a few different factors, like your filing status and tax bracket. Most people are interested in how to avoid paying capital gains taxes, so let’s talk about the capital gains tax exclusion. If you’re lucky, you can probably qualify, and if not you may still be eligible for a partial exclusion. The exclusion is due to the Taxpayer Relief Act.

Capital Gains Exclusions

You can avoid paying taxes for capital gain from your home sale if you have used the home as your primary residence for at least 2 out of the last 5 years. In this case, up to $250,000 profit is tax free if you’re single. Married couples filing jointly are eligible for a capital gains exclusion for up to $500,000 profit. Tax rules state you also can’t have claimed any other house in the past 2 years. The law allows for this amount of the capital gain to be excluded from your taxable income, and you can do it every 2 years with the same rules applying.

Additional Info

In addition, the 2 years doesn’t have to be consecutive, and it doesn’t have to be the 2 years immediately prior. As long as you owned the house and used it as your main residence for at least a total of 2 (you can count by days, 730, or 24 full months) of the last 5 years.

If You’re a Married Couple Filing Jointly

If married filing jointly, as long as at least one spouse owned the house and both spouses lived in the house for at least 2 of the past 5 years. If you’re awarded a home in a divorce settlement, you can count the time your spouse owned the home as time you owned it towards the tax break. There are some other exceptions, so speak to a tax professional if you have special circumstances.

Service Members

If you or your spouse serve on what’s called qualified official extended duty in the uniformed services, foreign service or federal intelligence agencies, you can suspend the 2-year ownership and use period for up to ten years. 

Real Estate Deals 

Keep in mind that the real estate agent will likely issue a form (1099-S) called the proceeds from real estate transactions, to the I.R.S. They do not have to file this form if you can give them certain assurances that you don’t have to pay capital gains taxes, or the home sale is less than $250,000 (or $500,000 for a married couple). Whether or not you receive one of these forms from the I.R.S., if you qualify for the exclusion, you do not have to report the sale on your tax return. Keep all the paperwork for the tax year, however, in case they ask for it.

Rental Properties

Due to the increase in house flippers, the government has cracked down on allowing homeowners to qualify on converting any investment property or second home to a primary home and avoid having to pay taxes on it. As of 2008, you are no longer allowed to use a rental property or second home by living in it for 2 years prior to selling. 

Calculating Gains 

Calculating capital gains for your tax return can be difficult, but not impossible. Long-term capital gains are for anything you’ve owned for more than a year. Short-term gains are for anything you’ve profited from you’ve owned for less than a year. Short-term capital gains are charged higher tax rates. Currently, long-term capital gains tax rates are between 15-20% depending on what tax bracket you’re in. Short-term gains are taxed at your ordinary income tax rate, which can be as high as 37%! 

Calculating Home Cost 

Your original cost has nothing to do with the fair market value. The original cost is your original purchase price of the home, plus certain closing costs. Don’t include things like title insurance, homeowners insurance, HOA fees, transfer taxes, attorney fees or property taxes. But everything else you can add. 

Adjusted Basis

The adjusted cost basis is after subtracting any deductions. For example, you can deduct any money spent on home improvements that add value to the house. Maintenance expenses, however, are not eligible. You can find details on this on the I.R.S. website. 

In Conclusion 

In conclusion, when it comes to your personal finance issues, you can always consult with a certified financial planner for assistance. After all, the idea is to either receive a refund, or owe nothing – you don’t want to receive a tax bill, and have to pay tax!

When Selling Your House…

We hope you’ve found the information you were looking for, and please remember if you get into a situation that requires you to sell your house fast, Sell Your House Fast – Kansas City is the company you can trust and depend on. We actually care about our clients, and want to help find fair solutions that benefit all parties involved.