It’s payday! Well, not technically. If you are looking to sell your home, you might come out of the process with a big check though.
For recent homes that were sold, the final sales price was a median of 99% of the final listing price.
How much can you make when you sell your home? The final answer will depend on multiple factors including the taxes on selling a home.
Read on to learn more.
What Is the Tax Rate on Selling a Home?
So, is there a tax on selling your home? The answer is maybe as taxes depend on a variety of factors.
The tax rate on selling a home isn’t simply found by taking the home’s sale price and subtracting the purchase price. Your capital gain depends on a cost basis and net proceeds.
Cost basis is the amount you paid to acquire an asset. This could include capital improvements and any acquisition costs.
An example of this would be paying $100,000 for your house and $3,000 in origination fees or other expenses. In this case, the cost basis would be $103,000.
If necessary, you can add the improvements that added value to the home to your cost basis. You can do this even when improvements occurred years after buying the home.
The income tax on selling a home also depends on knowing the net proceeds. This is the amount you sold a home for after determining the selling-related expenses. For example, real estate commissions.
If you sell your home for $300,000 but spend $20,000 in commissions plus closing costs, the net proceeds are $280,000.
A general home sale transaction, also known as a straight sale, have pretty straightforward rules, hence the name. Most of the time, these sales don’t trigger taxes.
As of 2020, most people can fit the requirements to exclude gains from taxable income. If you make $250,000 or less in profit and have lived in a home for at least two out of the previous five years, you don’t owe taxes.
For married couples, it’s a little different. If you and your spouse have both lived in the home for two of the previous five years, it changes to $500,000 in profit or less combined.
Capital gains taxes always depend on how long you’ve owned the home and your income. There are two broad categories of capital gains:
- Short-term capital gains
- Long-term capital gains
Short-term capital gains happen if you’ve owned your home for less than a year while long-term capital gains occur if you’ve owned the home for more than a year. Most home sales fall under the long-term capital gains category.
Profits that exceed these rates mean you will pay the capital gains tax rate. This could be anywhere from 0-20% depending on the tax bracket you are in.
However, there are some exceptions. If you have to move because of an illness or you lost your job, it’s possible you won’t have to pay the taxes.
Taxes on selling a home are different if you opt for an installment plan sale. This method of selling can spread the tax liability over several years.
When you agree on a down payment and then receive annual payments with it, you’ll pay taxes based on the percentage of your profit on each payment instead of the total gain.
When you finish paying these taxes, you’ll have paid the same amount you would have if you paid them all at once. Yet, you might pay these taxes at a lower average rate than the rate you would normally pay on the entire gain.
Many real estate state tax laws are similar to the federal tax code with some exceptions. If you need a complete picture of state taxes for where you live, contact the tax department where your property sits.
The tax laws on selling your home are reduced through depreciation. Real estate sales use depreciation based on the use of the property. It is more common to depreciate a business or rental unit, but you can depreciate a home.
A deduction will reduce the annual taxes that you pay. You have to pay the taxes deferred by depreciation when you sell your home.
When Are Taxes Due?
Any capital gains taxes you incur when selling your home are due on the tax deadline for the year that the sale closes.
It is always recommended to send your estimated capital gains tax to the IRS once the sale closes. This is because there are circumstances where you might be required to make estimated payments.
Even if you aren’t required to do this, sending in your estimated taxes right when the sale concludes can prevent you from emptying your pockets during tax season.
You can also choose to increase your withholdings throughout the year instead of sending a lump sum to the IRS. If you need a down payment for your next home, this is the best idea because you’ll gain all the proceeds from your home sale.
We have simplified this process and always recommend speaking to a tax professional about when to pay your taxes and how.
Tax Rules on Selling a Second Home
If you have a vacation home or second home that you want to sell, you likely won’t qualify for home sale gain exclusions. There is an exception for those who have lived on the property for at least two out of the five previous years.
Without this exception, you will be taxed on your net gain. If you depreciated the property while you owned it, you’ll pay depreciation recapture taxes as well.
Talking to the IRS can benefit you during the process of selling a house whether it is your only home or second home.
Taxes on Selling a Home Explained
For most, the process of selling a house is stressful, but the gain you receive from the sale is a plus. To truly understand your gain, you’ll need to know the rules for taxes on selling a home.
Whether or not you are taxed depends on several factors. Use this guide to avoid overestimating your profit by ignoring the accumulated taxes.
For more articles on real estate and the home, check out the other posts on our blog.