Selling your house can seem like a daunting task for those who are inexperienced in doing so, especially for first time-sellers in this situation. What may look like a simple transaction on the surface can actually become much more complex than that.
Selling a home is a bit more complicated than selling other miscellaneous items, or even larger ones such as a vehicle. Most buyer-seller interactions simply involve the exchange of funds for goods, but these high-dollar items, like houses, come with many more layers than the rest.
Before you sell your home, there’s something you should be aware of prior to going out and putting that for sale sign on the front lawn. That “thing” is taxes, and it can get complicated. Take these tips into account before and throughout the process, and you’ll have the experience to make selling your home a breeze should you find yourself in the position to sell again.
First And Foremost, Taxes
A home is typically an investment, and when you sell your investments you have to pay taxes, just as you have to pay taxes when selling a house too. But how are profits generated from selling a home looked at from an income perspective by the IRS?
Selling an asset like a home is treated as a capital-gains tax from the IRS’s standpoint. When it comes to capital-gains taxes, you’ve got both long- and short-term classifications of this tax. If you’ve owned your property for over a year, that qualifies as a long-term gain, and if not, then the profits realized from the sale of your house would be a long-term gain.
Short-Term Vs Long-Term Capital Gains Taxes
From a tax-optimization perspective, the ideal situation is to have held the property for over a year. There are far more exemptions available for long-term capital gains than short. When you sell a property which you’ve owned for less than a year, those short-term financial gains are taxed as ordinary income, just like any other stock bought and sold within a year for a short-term profit.
This means that the income will be taxed at your typical income bracket’s tax rate. For example, if you were making $40,000 per year annually and sold a house that earned you a net profit of $100,000, you’ve just moved yourself up into the 24% tax bracket if you’re filing as single, head of household, or as married filing separately.
There are ways to mitigate this of course, which may be especially useful to those engaged in the buying and selling of investment properties as a business. Most, if not all, of this will come in the form of write-offs that you can count as business expenses which contributed to acquiring your income.
These might include costs to market the property, costs to find it and your research time or expenses, lawyer fees, renovations, closing costs, and other miscellaneous expenses that go along with buying and selling a home.
Long-Term Capital Gains Taxes
When it comes to selling a property owned for more than a year and long-term capital gains taxes, there exists several exemptions to save you a bit on taxes. Long-term capital gains rates are notably lower than short-term, and in some cases, you can avoid them altogether.
You need not pay any capital gains taxes at all on up to $250,000 if filing singly, or up to $500,000 if married and filing jointly if you meet the following 3 conditions. Firstly, you’ve lived in your home for 2 out of the last 5 years. They don’t have to be consecutive either. Next, you’ve owned the property for at least 2 years, and lastly, you haven’t claimed another exemption.
As for property you’ve inherited, the value of the home may be much higher now than the original price the owner paid many years ago. Because of this, capital gains taxes on such a high amount could easily get out of hand and be a bit unreasonable. So, there’s the stepped-up basis rule.
This rule simply calculates your cost basis for the home at its present market value instead of what was paid for it years ago. So if your home in San Francisco was purchased for $100,000 by your great grandpa in 1942 and it’s now worth $700,000, your cost basis is $700,000, not $100,000. Capital gains taxes would only be paid on anything over $700,000 that it brought.
When it comes to selling a home, it pays to learn beforehand. Knowing what you’re in for, especially financially, can help reduce any delay in the sale time and the time that it takes overall for sellers to get their financials together.