When Selling My House, What Taxes Do I Pay?
Selling a house is a big undertaking, and if you haven’t sold many homes, there are a lot of lessons to learn. How do you transfer money from the buyer to the seller? How long should the process take? What is a good deal on a house right now? Those are all important questions, and there’s another that is often overlooked by home sellers: When I sell my house, what taxes do I pay?
Did You Make a Profit?
Taxes on the profits from selling a house can be significant. There are a few key things to understand about these taxes. The most important is that you are only paying taxes on money beyond what you paid for the house. This is regardless of your remaining loan amount. If you agreed to buy the house for $200,000 and you sell it for $200,000, there are no taxes. If you sell it for $200,001, then you are potentially taxed on that $1 profit.
It’s important that we look at how this relates to loans. It’s common to sell a house while you still have a mortgage remaining on the property. It is entirely possible to sell a house and not make enough profit to cover the remaining mortgage and the taxes due on your profit.
Fortunately, there is a standard tax deduction that is designed to prevent that scenario. This is the primary residence deduction. If you live in the house for at least two of the five years before you sell it, you can get up to $250,000 of your profit tax-free. For married joint filers, that is doubled to $500,000. This is a simplification of the rule. You should go over the details fromthe IRS before assuming you will qualify for the full deduction.
The Capital Gains Tax
Now that we have covered what is typically taxed, it’s important to understand how that tax is applied. It is called a capital gains tax, and it applies to the liquidation of any property, not just real estate. The most important thing to understand is that capital gains tax rates are not solely dependent on your income or the value of the property.
Capital gains can fall under one of two classifications: short term or long term. A short-term gains tax is applied to assets that were owned for less than a year before they are sold. So, if you bought your house within 12 months of the sale, you’re looking at a short-term gains tax. The bad news is that short-term rates are higher than long-term rates. Basically, the short-term rate will be equal to your federal income tax rate, but there’s a huge catch. The profit of your sale counts as income, which can easily bump you up to a higher tax bracket for the year.
If you own the place for more than a year before you sell it, you get the long-term rate, and it’s much nicer. It still depends on your income, but there are only three brackets, and they cap at 20 percent. The long-term rate will almost always wind up being lower than your normal tax bracket.
Additional Taxes
Capital gains tax is the big fish in this sea, but there are other taxes and fees that can get you when you sell a home. For instance, you might have to pay filing fees with the county in order to record the sale. There may be other local fees attached to the process.
And then there are property taxes. Generally speaking, the responsibility for property taxes will be ironed out in the sale contract. Since you’re each owning the house within a fiscal year, you’re both on the hook for those property taxes. The standard agreement is that you pay the taxes equal to the amount of time you own the home in the year it is sold, but alternative agreements can be made and are legally binding when in a contract.
Those are the major taxes that you will see when you sell your house. If you want to sell your house quickly, Frank Buys Houses will make you a cash offer right away. You will still be liable for gains taxes, but we will simplify a lot of the other home sale process headaches. Contact us online or call us at 209-395-1355.