Taxes on Selling a House: What You Need To Know
Have you decided to sell your home?
Your home is one of the most important assets you’ll ever own, and the decision to sell it isn’t easy. You’ll likely have gone through all the pros and cons before making the hard decision. But did you know that there are taxes to consider too?
Don’t worry, we can help walk you through it. Keep reading to learn more about taxes on selling a house and everything you need to know.
Do You Have to Pay Taxes When Selling a House?
Once you’ve put your home up for sale and the offers come in, chances are you’re looking to get more than you paid for it. At this point, it’s only natural to wonder if you’ll have to pay any capital gains taxes on that money after you complete the sale.
In short, the answer is yes, you might have to.
This will depend on your circumstances though. There is a loophole allowed by the IRS known as the “home sale gain exclusion”. Or you might see it referred to as the “primary residence exclusion”.
This lets sellers exclude from taxation up to $500,000 in capital gains. That is if you and your partner are joint filing your taxes. If you’re filing by yourself, it’s up to $250,000.
This has to be from the sale of a house you have used as your primary home for 2 of the last 5 preceding years. You can’t claim this exemption again for another 2 years after this sale.
So, as an example, say you and your spouse bought a home 15 years ago for $300,000. You won’t have a capital gains tax bill until your net proceeds (gains) reach over $800,000.
House Taxes – Cost Basis & Net Sale Price
It’s not as simple as taking the price you sell for and taking away the price you paid for it to work out the gains. The capital gain differs from net proceeds and cost basis. Let’s look at these terms a little more.
Cost Basis
This is the amount you paid to buy the asset (your home). It includes the acquisition costs and any capital improvements (major renovations). For example, if you paid $350,000 for your house and $5,000 in origination fees, that’s a cost basis of $355,000.
Net Proceeds
This is the amount you sell your house for, after expenses like realtor commissions. So, say you sell your home for $500,000 and pay $30,000 in commissions, your net proceeds are $470,000.
This is something that works in your favor. You might have paid $300,000 for your home and sold it later for $450,000. That might sound like a gain of $150,000.
But, say you paid $5,000 in origination fees, did a $50,000 extension, and paid $25,000 in sale commission. That adds up to $80,000. Taken away from the $150,000, that’s a gain of $70,000.
How Much Will Capital Gains Tax Cost?
As we discussed above, for couples filing together $500,000 of net gain is exempt. For singles, that’s $250,000. If you and your spouse bought your home for $300,000 and your net proceeds are $1,100,000, that’s $800,000 capital gain.
$500,000 of that would be exempt if you file your taxes together. The remaining $300,000 would be subject to capital gains taxes. The amount of this tax will vary depending on your income and how long you owned the house.
The IRS has two categories for capital gains:
- Short-term for assets owned for 1 year or less
- Long-term for assets owned longer than 1 year
Given the nature of homes, most will fall into the latter of the two. But, if it does fall into short-term, it’s taxable like ordinary income, at your tax bracket amount.
Long-term capital gains receive more favorable rates. They’re measured at rates of 0%, 15%, or 20% depending on taxable income. At 0%, the income for singles ranges from $0 – $40,000, married filing together it’s $0 – $80,000.
At 15% for singles it’s taxable income of $40,000 – $441,450, for married filing together it’s $80,000 – $496,050. At 20%, the income range for singles is $441,450+ and for married filing together it’s $496,050+.
When You Sell a House When is the Tax Due?
The short of it is, any capital gains tax you need to pay is due at the end of the financial year tax deadline. This is for the year that your home sale completes. So, for example, if it’s sold in October 2021, it’s due April 15, 2022.
There are some situations where you might have to make an estimated tax payment, so check with the IRS. Even if you don’t have to, it could be an idea to do it when the sale closes.
This way, you don’t have to worry about keeping that money set aside for the next tax date to roll around. It’s always best to speak with a tax professional though if you’re unsure of if you need to pay capital gains tax. They can tell you the best way to do it, and help you through the process.
Taxes When you Sell Property Investments or Vacation Homes
If you sell real estate for investment or you’re selling a vacation home, you won’t be exempt in most cases. The only exception to this is if you lived in that property for 2 of the previous 5 years. If not, all your net gain is up for taxation.
If you depreciate the property while you own it, you could have to pay depreciation recapture tax. The basic idea is you deduct the property cost over time, to reduce the taxes due on their rental income. But, the IRS taxes this back at sale via a tax called the depreciation recapture tax.
This tax is set at a rate of 25% of the total depreciation deductions. So, if you claim $100,000 in depreciation, your recapture tax amount due will be $25,000 upon sale. Even if your investment home or vacation home does qualify for exemptions this tax will stay. Depreciation recapture tax is never excluded.
Taxes on Selling a House: Know What to Expect
So, there you have it! Now you know know what to expect from taxes on selling a house.
Before your sale completes, it’s always worth talking to a tax professional. They can look at your finances and let you know the exact amount you should expect to pay tax on. But, for most normal house sales there are tax exemptions to make use of.
If you’re looking for a quick, hassle-free sale, contact us today. At We Buy Houses, we pay cash for homes in Nashville, TN, and surrounding areas.
