Want to learn more about taxes when selling a home? Home sellers are responsible for paying taxes on the profits of their home sale. However, there are some exceptions to this. You may not have to worry about paying taxes if your profit falls within a certain amount.
That’s why it’s so important to understand your tax responsibilities when selling a home. The more prepared you are, the better you can plan your home sale.
In this post, our team at Your Home Sold Guaranteed Realty — The Nathan Clark Team will discuss everything home sellers need to know about taxes when selling a home.
What Taxes Do Home Sellers Have To Pay?
The type of tax you have to pay depends on how long you’ve lived in the home. If you owned the home for less than a year, your profits are taxed as ordinary income. This means you’ll include it with your regular income and pay taxes based on your income bracket.
But if you’ve lived in the home for over a year, you’ll pay long-term capital gains tax on the profits of the sale. However, there are some exceptions to this, based on how large your profit is, your marital status, and whether the home was your primary residence.
The IRS considers a property to be a primary residence if you’ve owned it for at least two years, and lived in it for at least two out of the five years leading up to the home sale.
If you’re an individual and you sell your primary residence for a profit of $250,000 or less, you don’t have to pay any capital gains tax. If your profit is higher than that, you can exclude $250,000 and only pay the remaining amount.
For example, if you make $400,000 and subtract the $250,000 exclusion, you would only need to pay capital gains tax on $150,000.
If you’re married, the exclusion amount is $500,000. So if the profit from your home sale was $500,000 or less, you wouldn’t have to pay capital gains tax. If the profit is higher, you can exclude $500,000 and only pay tax on the remaining amount.
It’s important to note that you can only take advantage of these exclusions once every two years.
How Can Sellers Reduce or Eliminate Capital Gains Taxes When Selling a Home?
Many home sellers wonder if there are ways to reduce the capital gains tax or eliminate it altogether. If your profit is larger than the available exclusion, there is no way to avoid capital gains tax entirely.
However, when you’re determining your profit from the home sale, there are several expenses you can add to the home’s cost basis. Adding these expenses ultimately ends up lowering the amount of profit you make.
The cost basis of a home is the total amount you paid for the property, including certain expenses. You’ll subtract this amount from the profits of your home sale to get your true profit.
First, you can add the amount you spent on qualifying home improvements to your cost basis. These don’t include necessary and routine repairs, but rather the types of renovations known as capital improvements.
Capital improvements raise the value of your home. They’re usually big-ticket items, like a new roof or an entire room remodel.
Second, you can add closing costs to your cost basis. These include costs for abstract fees, legal fees, transfer taxes, owner’s title insurance, and more.
Lastly, you can also add realtor commission fees to your cost basis. As the home seller, it’s traditionally expected for you to cover the commission for both your realtor as well as the buyer’s agent.
You might find that once you add all these expenses to your cost basis, your profit is lowered or brought closer to the $250,000 or $500,000 exclusion amounts. This will ultimately lower the amount you’ll have to pay taxes on.
*ALWAYS SEEK GUIDANCE AND ADVICE FROM A CPA OR ACCOUNT AS IT RELATES TO YOUR SPECIFIC SITUATION. THIS INFORMATION IS FOR EDUCATIONAL PURPOSES ONLY AND IS NOT MEANT AS TAX ADVICE*
We Can Help You Sell a Home For Top Dollar in New England
Working with an experienced realtor is the best way to calculate the profit you’ll make on your home sale. When you have an estimate of your profit, you can budget for the taxes, home improvements, and closing costs you’ll likely pay for.
At Your Home Sold Guaranteed Realty — The Nathan Clark Team, we’ve been helping home sellers in New England for over 21 years. We’ve gained a reputation as one of the most successful real estate teams in the area. In fact, we sell homes 30% faster and for nearly 7.5% more than our competitors.
On top of that, we offer several seller’s guarantees to protect your interests during the selling process. These include our Guaranteed Home Sale Program, Home Seller Satisfaction Guarantees, and Seller Cancellation Guarantee.
To learn more about working with our award-winning real estate team, give us a call at 401-288-3557 or fill out the form below for more information.
*ALWAYS SEEK GUIDANCE AND ADVICE FROM A CPA OR ACCOUNT AS IT RELATES TO YOUR SPECIFIC SITUATION. THIS INFORMATION IS FOR EDUCATIONAL PURPOSES ONLY AND IS NOT MEANT AS TAX ADVICE*
