What Are The Tax Implications Of Selling A House?
The time has finally come when you are thinking of selling your property. You likely find that it’s too long a commute from your workplace or your children’s school or even too far from your family. You will likely use the money towards a down payment for your new home. However, are you aware that there may be tax implications of selling your home? It is important to take note of this as you could end up overestimating your gains. This article will take you through the ins and outs of taxes for selling your home.
Will I Be Taxed For Selling My Home?
The answer is it really depends. The primary residence exclusion enables sellers to exclude as much as $250,000 from their taxation. For those who file joint taxes, they can exclude up to $500,000 in taxes. There are a few conditions, however. You must have lived in that home for at least 2 of the prior five years. Additionally, you must have owned the home for two years and it must have been your primary residence. Let’s consider a scenario. Suppose Jack and Jill bought their home for $400,000 and lived there for five years. They would not need to pay any taxes should the sale of their home be less than $900,000.
Capital Gains Tax
Hold your horses because it is not as easy as subtracting your selling price from your cost price. There are some more nuances. Your capital gain is defined as the price difference between your net proceeds and cost basis. The former refers to how much you’ve sold your house for after accounting for miscellaneous fees like real estate commission. The cost basis is how much you paid for your home taking into account major renovations. This usually works out in favor of the buyer.
Ultimately, your capital gains tax is paid on any amount larger than $500,000. Suppose in the earlier example, Jack and Jill managed to sell their home for $1,000,000, they would need to pay taxes on $100,000. There are three categories of capital gains tax depending on your income tax bracket. For couples with a joint income of less than $89,250 per annum, their tax would be 0%. Should their joint income be between $89,251 and $553,850, their taxable amount would be 15%. Finally, 20% is incurred on any amount above $553,850.
If Jack and Jill were to have a combined annual income of $200,000, they would fall under the 15% category. Thus, they would be paying 15% of $100,000 i.e., $15,000. This amount should be paid when the tax deadline is due. You could choose to pay a lump sum or pay in increments throughout the year.
Can I Avoid Taxes?
Simply put, yes! There are a few ways you can do this.
- 1031 Exchange
- Tax loss harvesting
- Not selling your property
Of course, the last one would only work if you do not need to sell your current home to buy another!
*Capital Gain tax amounts noted above are based on IRS 2023 Long Term Capital Gain Tax Chart. Please consult your CPA for current year amounts and state specific capital gain tax breaks.