Selling your home can be exciting, but it’s also essential to understand the tax implications involved. Here’s a breakdown of how taxes work when you sell your property:
Capital Gains Tax: This is the primary tax you’ll encounter when selling a home. It applies to the profit you make on the sale, which is calculated by subtracting the original purchase price (including closing costs) and any improvements made to the home from the selling price.
- Long-Term Capital Gains: If you’ve owned and lived in the property for at least two of the past five years before selling, you qualify for the long-term capital gains tax rate. This rate is typically lower than your ordinary income tax rate, making it a tax advantage for homeowners. There’s also a capital gains exclusion of up to $250,000 for single filers and $500,000 for married couples filing jointly, which can further reduce your tax burden.
- Short-Term Capital Gains: If you still need to meet the two-year ownership requirement, you’ll be taxed on the profit at your ordinary income tax rate. This can be a significant tax hit, so it’s essential to factor in the potential tax implications before selling a home you last lived in for an extended period.
Seller’s Disclosure: When selling your home, you must legally disclose any known defects in the property. While this doesn’t directly affect your taxes, it can impact your selling price and capital gains. Being upfront about any issues can help avoid future legal problems and ensure a smoother sales process.
Tax Deductions: When selling your home, consider some tax benefits. You can deduct the cost of selling expenses, such as realtor commissions, closing costs, and home improvement projects completed within the past two years (up to a limit), to reduce your taxable capital gain.
Tax-Free Homesale Exclusion: If the property you’re selling was your primary residence for at least two of the past five years, you may be eligible to exclude up to $250,000 of capital gains from your taxes (or $500,000 if married filing jointly). This can be a significant tax benefit, especially for homeowners who have seen their property value appreciate over time.
Consulting a Tax Professional: The world of taxes can be complex, especially regarding real estate transactions. Consulting with a tax professional is highly recommended for a more personalised understanding of your situation. They can help you navigate the specific rules and regulations that apply to your unique circumstances and ensure you maximise your tax benefits when selling your home.