Whether you are the buyer or seller in a real estate transaction, it is fundamental to be aware of the tax burden associated with such deals. Many US residents selling a house do not have a clue about the tax consequences of this type of transaction, making the whole experience overwhelming.
Read on for a full overview of the taxes paid when selling a house in the US.
Capital Gains Taxes – The Fundamentals
The term “capital gains” refers to the profit earned from the sale of “capital assets.” Examples of capital assets include stocks, bonds, and real property such as land plots or houses. If someone earns capital gains, US law will require that individual to pay taxes on those profits.
Depending on the state where the property sold is located, the seller must pay taxes at the state and federal levels. The capital gains tax must be reported on the seller’s return.
Calculating the taxable gain in a house sale can be complex without considering the particularities of each transaction. In most cases, the basic calculation is based on the sales price minus selling costs (e.g., commissions), cost basis, and home exemption.
The cost basis refers to the original cost of the house plus any improvement made by the seller during the time of ownership. Depending on the case, it is also possible to obtain a home exemption.
Long-Term Capital Gain Rates
Another important factor to consider is the “net gain,” which is the income received from the sale of goods subtracted from how much money was spent on the acquisition and improvement of the same assets.
If the calculation reveals a net gain, the seller may be subject to long-term capital gain. Depending on the seller’s other sources of income, the long-term capital gain rate can be as low as zero going up to 15%.
How Much Do I Need to Pay in Federal Taxes for Selling a House?
The amount of taxes due to the Internal Revenue Service (IRS) on the sale of a house depends on several elements, including the federal tax bracket, the seller’s filing status (i.e., jointly filing, single filing, etc.), and the period the house was under the control of the seller.
The end use of the house (i.e., residence, investment property, etc.) also impacts the final calculation. It is also important to consider short-term capital gains, which incur different taxes from long-term capital gains.
Owning a property for one year or less incurs capital gain taxes similar to regular income. Conversely, owning a property for over one-year results incurs long-term tax rates, which tend to be more favorable.
Is It Possible to Avoid Capital Gains Tax When Selling a House?
Different state regulations determine how property sellers can avoid (or at least reduce) the percentage of taxes paid on the proceeds of the transaction. At the federal level, the default rules provided by IRS allow house sellers to avoid capital gains tax under specific conditions.
For example, a house seller may qualify for a partial exclusion depending on the reason behind the sale, such as a change in workplace location, health issues (i.e., using the proceeds to pay for medical treatment of severe illness), or an unforeseeable event.
The percentage excluded from the due amount of taxes varies according to the period the house was owned by the seller, how long the seller lived in the house before the transaction, and whether the seller has filed to exclude capital gains on the sale of another property recently.
Protect Your Interests and Ensure Full Tax Compliance When Selling a House – Consult an Expert CPA Today
Navigating tax regulations without professional guidance can be challenging. Call Certified Public Accountant Edward D. Quilca at (786) 310-5582 or email [email protected] for expert assistance today.
