The amount of taxes you pay varies by state and county, but this number is calculable. Start with the home's final selling price. The property and real estate transfer taxes are a percentage of the sale price of your home. Find the applicable percentages and add the numbers together.
The last step is the calculation of capital gains. After calculating the difference between the selling price and the cost base, you will know how much is subject to taxation. For tax purposes, married couples filing jointly can exclude up to $500,000 in capital gains. A single taxpayer is limited to a $250,000 exclusion. Add the cost of any home modifications to your cost base to reduce your tax liability. For instance, if a married couple purchased a home for $500,000 and then sold it for $1,150,000, they would owe $100,000 in capital gains taxes. If you invest $200,000 in house upgrades, however, you can increase your cost basis and avoid capital gains taxes.
We've previously covered the fundamentals, but every transaction is intricate. Therefore, take in mind these additional tax regulations when selling a home.
Investment properties don’t receive the same tax treatment: The IRS will not disregard the first $250,000 to $500,000 in capital gains, depending on your filing status, for investment properties. This exemption is limited to a primary residence by the IRS. The full difference between the cost basis and the selling price is subject to capital gains tax.
You have not been there long enough: Some real estate investors amass assets and move from residence to residence. You can reside in a property for one year and then rent it out the next. The government will consider the number of years you have resided on the property throughout the past five years. If you have resided in the property for less than two years, it is not regarded as your principal residence. You will be required to pay taxes on all capital gains. There are exceptions if you are disabled or served in the military, foreign service, or intelligence community; refer to IRS Publication 523 for more information.
You exhausted your capital gains exemption earlier: You cannot save between $250,000 and $500,000 on each purchase. If you have utilized this tax deduction within the past two years, you are no longer eligible. To avoid paying capital gains tax when selling your new primary dwelling, you must wait at least two years.
You utilized a 1031 Exchange: A 1031 Exchange allows you to avoid paying capital gains tax on the property. If you purchase a similar property in a timely manner, you can avoid paying capital gains tax. Next time you sell a house, you'll owe additional capital gains taxes, but you can continue delaying through 1031 Exchanges. If you transfer the property to an heir, the cost basis is increased. It is as though the heir bought the property on the day of death for tax purposes. In this circumstance, earlier capital gains are not accounted for and do not reappear. 1031 Exchanges can be used for either a primary dwelling or an investment property.
Expatriate Taxes: If your property is located overseas, you must still pay U.S. capital gains taxes. On Form 1040, you must record capital gains and rental income from a foreign property.
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