Selling a house is always an exciting development for many homeowners because of the expected profit from the sale. The sheer joy at the promise of profiting off your home sale shouldn’t cloud the fact that taxes can impact a considerable reduction in profit.
Therefore, understanding the taxes required for home sales is necessary knowledge for homeowners. This article discusses how much you’re expected to pay in taxes when you sell a house:
1. Property Taxes
Property taxes are annual deductible taxes determined by states. States differ in their approach to property taxes, but the cost tends to range between 0.18–1.89% across the US. If the state itself doesn’t deduct property taxes, they allow counties, cities, and school districts to charge property taxes instead.
The deducted tax is meant for the maintenance of local services, law enforcement, and schools. Local county assessors evaluate each property in their county annually. The amount payable is then paid either in May or September.
You can reduce your tax amount by taking advantage of several property tax exemptions available in your locality. Further reductions can be achieved with the homestead exemption. It allows primary owners to enjoy tax exemptions up to $25,000 and in the initial property valuation of $50,000. It’s important to know these tax tips when you sell your house and find out whether you need to file for it or it’s a natural right in your locality.
2. Real Estate Transfer Taxes
Also known as deed transfer tax, this amount is imposed on the property transfer process by the state, city, or county in which the property is located. Not all states impose this tax, but for most states, it’s a specified percentage of the total home sale.
According to a report by the National Association Realtors, Colorado has the lowest real estate transfer tax of 0.01% and the District of Columbia has the highest at 1.1%. The home seller is the one primarily liable for paying this tax, but it could be shared between both the seller and the buyer as a result of negotiations.
3. Capital Gains Taxes
Capital gain on your property is the difference between your cost basis and net proceeds. The net proceeds are the amount you’re left with after you’ve completed the sale. This requires you to deduct all processing fees and commissions from the total sale price of the home.
Cost basis is a summation of the purchase price, origination fees, processing fees, and the improvements made on the building since purchase. The list of eligible improvements includes renovations, home extensions, and appliance upgrades.
Capital gain tax is charged after the initial $250,000 profit for singles and $500,000 profit for couples. The type of investment, either short-term or long-term, determines the type of tax that will be due from your property.
Short-term capital gain tax is charged on a home that has been held for less than a year while long-term is charged on a house that has been held for more than a year. The tax code which favors long-term investment allows a lower tax deduction on them while short-term investments are taxed as ordinary income.
4. Taxes on Vacation Homes
There is a basic requirement that you live in a house for at least two years to be eligible for a capital gain exclusion. Otherwise, you will be liable to pay the capital gain tax. Owners who have depreciated their property over their ownership period will also be expected to pay a depreciation recapture tax.
Depreciation is a systematic process used by investment property houses to reduce their taxable income by deducting the cost of the property throughout ownership. The government recovers the deducted taxes after its sale through a depreciation recapture process. This tax type can’t be excluded from your after sales tax.
Takeaway
Home sales can be a truly exciting journey for you if you can protect your net profit with the tips discussed above. The property tax which you’re required to pay annually must be paid off during a home sale to complete the process of the sale.
The deed transfer tax is payable just as you complete your deal negotiations and paper. The capital gains deducted on your net profit adds to your tax burden. Many of these taxes are avoidable if you fulfill some requirements and only depreciation recapture can’t be written off on your tax bill. Therefore, the total tax amount to be paid when you sell a house is subject to the exclusions and value of your home.
