Taxes are an inevitable issue with a home sale, and it’s definitely worth a seller’s time to know the tax implications of selling a house. But your head doesn’t have to spin. Here’s some straight talk on some of the basics.
What You Need to Know About Federal Taxes
Although you don’t pay federal property taxes on your house, there can be federal taxes to pay on the income from its sale. But not for everyone. The Taxpayer Relief Act of 1997 says you do NOT have to pay capital gains tax on your home sale if:
- You have lived in the house full-time for at least two of the previous five years, meaning it is a primary residence
- Your profit (the sale price minus the price you paid for the house) is under $250,000 if single or $500,000 if married
If you do have profits over these amounts, the capital gains tax rate is 0% for people in the bottom tax brackets, 15% for most of us, and 20% for those in the top brackets.
There can be exceptions if you are selling under duress, because of a health crisis or lost employment.
On another “federal” note, some misunderstanding has arisen out there about capital gains tax under the Affordable Care Act. There is NOT an automatic 3.8% tax on all home sales.
Real Estate Tax for Sellers and Buyers
The seller pays the property tax from the start of the tax year to the date of closing (the tax year varies by state, so you can check yours on this listing of property tax calendars). After the closing date, the buyer is responsible for the rest of the year’s taxes.
If you prepaid your real estate tax for the year and then sell the house, the buyer should reimburse you a prorated amount. Make sure that’s in the contract they sign! Likewise, if you owe taxes, the contract will need to include the prorated amount that you’ll pay the buyer.
Writing It Off
The IRS assumes the seller paid property tax up to the date of sale, so you can itemize that amount as a deduction for that year.
If you’re selling because you’re relocating for a job, you can write off some costs if the following applies:
- The distance between old and new jobs is 50+ miles more than your previous commute
- You work full time 39+ weeks in the new location your first year there
- You work full time 78+ weeks within two years if you are sole proprietor or partner and have transferred yourself
Here’s what you can write off:
- The cost of packing, shipping, and insuring possessions, including 30 days of storage
- Moving costs, such as lodging along the way and gas/mileage
- The cost of switching utilities from your old to your new home
Get IRS form 3093 (Moving Expenses).
When to Ask a Specialist
Some selling situations come with trickier tax questions such as 1031 exchange rules that you should bring to an expert, and your real estate agent may be able to recommend one. These questions might include:
- Dealing with estate taxes
- Putting a property in the name of an estate or company instead of in your own name
- Buying or selling property in the United States if you are not a citizen or a resident
Taxes can be a complicated, but knowing the basics helps you do further research and ask the right questions.
