DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need help determining the taxes on your home sale, please consult a skilled tax professional.
You’re about to sell your home. And you know that on the other side of all the work — weeks or months of working in tandem with your agent, navigating marketing and open houses and cleaning galore — you’ll have to figure out the financial side of things.
You know what I mean: taxes.
You’ve tried to be prepared, but searching for answers has left you with a thumping headache and the need for a tax-talk to normal-speak translator.
That’s why we’re here. Read on to find out — in actual layman’s terms! — what effect selling your home will have on your taxes, how to maximize all of your deductions, when you need to talk to a specialized professional, and more:
Home-Selling Tax Implications 101: Start With the Fundamentals
Since you’re a homeowner, you probably know that there are no property taxes on a federal level, just local levels (state, city, county, municipality, etc.). But there are (potentially) federal taxes on the income you make from selling your home.
The good news:
If you’ve lived in your home for at least two of the previous five years, you owe little to no taxes on its sale. Thanks to the Taxpayer Relief Act of 1997, you can make up to $250,000 in profit when you sell your primary residence, twice that much if you’re married, and not owe any capital gains taxes.
In other words, if you originally bought your home for $150,000, you wouldn’t owe any taxes unless you sold it for more than $400,000 (or more than $650,000 if you’re married).
If your profits exceed that, you’ll pay the capital gains tax rate, which is 0% for people in the bottom 10% or 15% tax brackets, 15% for most people, and 20% for people in the top bracket. There are a few exceptions in this scenario — if you’re in the military on qualified extended duty or have to move because of a lost job or an illness, you might not have to pay.
The “Obamacare tax”
There’s some misunderstanding about taxes included as part of the Affordable Care Act (aka Obamacare) and how it affects taxes on income from home sales.
Let’s clear that up.
The common misconception is that there’s now a federal tax of 3% imposed on home sales. This likely originates from the fact that the bill does include a 3.8% Medicare tax — but only on taxpayers who exceed a total household income. That Medicare tax, or Net Investment Income Tax, only applies to you if your adjusted gross income is over $200,000 if you’re single — or $250,000 if you’re married.
However, the tax typically doesn’t include capital gains that result from the sale of a home (so long as the home is a residence and not a vacation or rental home). So even if you’re over that income threshold, it’s unlikely that you’ll have to pay the 3.8% tax on your home sale proceeds.
What about the real estate taxes for the year your home is sold?
Ideally, the seller will pay the taxes from the beginning of the real estate tax year until the date of closing. If you aren’t sure when the real estate year runs in your state, check out this listing of property tax calendars by state. The buyer pays the taxes for the rest of the year, after closing.
If you’ve pre-paid the taxes for the entire year, the buyer should be required by contract to reimburse you for the prorated share of taxes. On the other hand, if none of the taxes have been paid, you should plan on paying the buyer prorated taxes, probably via an escrow account.
All of this should be clearly outlined in your home sale contract, so that neither of you loses money.
As far as your potential deductions go…
The IRS automatically treats the seller as having paid the property taxes up to the date of sale and the buyer having paid the taxes after the due date. So, you can still deduct the real estate taxes that you did pay as an itemized deduction for that year.
Active Military transferring to a new station? Write off your move
If you’re a member of the Armed Forces selling your home because you’ve been permanently relocated due to a military order, there’s at least one sweet bonus to look forward to: a tax-deductible move.
According to IRS Publication 3, you can deduct:
- Transportation and storage of household goods and personal items
- Travel from your old home to your new home (including lodging)
Take note that those late-night stops for boredom Cheez-its and canned espresso (and all meals for that matter) will not be deductible- see Form 3903.
Relocating for a regular day job? You’re out of luck. You used to be able to deduct moving expenses if your new home was at least 50 miles closer to your new job than your old home was (the distance test), and you’d been working that job full-time for 39 weeks within the first year after you moved (the time test). But the 2017 tax reforms buttoned up this deduction to only include military relocations, as explained in the IRS Armed Forces’ Tax Guide.
Taxes on Investment Properties
Most of the above rules hold true for residential properties (defined as properties that you have lived in, full time, for at least two of the previous five years). If you’re selling an investment property, keep in mind that holding on to it for at least a year often saves money on the taxes.
Richard Paz, a Miami Beach seller’s agent in the top 1% of local agents, recalls a previous client: “They’d renovated it, and had about $100,000 in profit on the table from a potential buyer. They delayed the closing so that it would be exactly a year after the purchase of the property, and saved thousands of dollars in taxes.” If you have any questions, check out the ultimate guide to real estate investment tax benefits at BiggerPockets.
When to talk to an accountant or attorney about property taxes:
Depending on your specific situation, you might have more questions. Rather than talking to your real estate agent, it’s a good idea to go to an accountant or attorney with specific questions, including:
- Questions about estate taxes or what will happen if/when the property owner dies (in this case, you’d talk to an estate planning attorney instead of a tax attorney)
- How to structure the ownership of the property — you want to put it in the name of an estate, trust or company, as opposed to your personal name
- Buying a property in the US, when you aren’t a US resident or citizen
Your real estate agent should be able to refer you to the appropriate professional, depending on your specific scenario and questions. Don’t have an agent? We can help you find your perfect one.
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