What Taxes Do I Need to Pay When Selling My Home?

The Basics of Taxes When Selling a Home

First things first, not everyone has to pay taxes on the sale of their home. There are certain exemptions and rules that might save you a lot of money. But before diving into those, let’s look at the three types of taxes that could come into play:

1. Capital Gains Tax

2. Property Tax

3. Real Estate Transfer Tax

Keep in mind, this is a general guide, consulting a tax professional or CPA is always a good idea to make sure you’re covered for your specific situation.

What Is Capital Gains Tax?

Capital gains tax is the tax you pay on the profit made from selling an asset, like a home. How much you owe depends on two main factors:

• How long you’ve owned the home

• Whether the home was your primary residence

Will You Owe Capital Gains Tax?

To figure this out, ask yourself these questions:

1. Did you own the home?

2. Was it your primary residence for at least 2 of the last 5 years before selling?

3. Has it been at least 2 years since you used a capital gains exemption on another home?

If you answered “yes” to all three, you might not owe taxes on the first $250,000 of profit if you’re single or $500,000 if you’re married and filing jointly.

For example, if you bought your home for $200,000 and sold it for $450,000, your $250,000 profit would fall within the exemption limits. No taxes for you!

However, if your profit exceeds these limits, you’ll owe taxes on the amount above the threshold. If you don’t meet the residency or ownership requirements, you’ll likely owe taxes unless special circumstances apply, such as the home generating rental income. For more information on capital gains taxes, check out this Tax considerations when selling a home | Internal Revenue Service

Key Exemptions for Capital Gains Taxes:

• Married Couples: One spouse needs to meet the ownership rule, but both must meet the residency rule.

• Special Situations: If you experienced a major life event like divorce, a job relocation, or health issues, you might qualify for a partial exemption.

• Unique Circumstances: Military personnel or government employees on extended duty might also qualify for reduced requirements.

What About Your Property Taxes You Ask?

Yes, property taxes still need to be paid up to the day you sell your home. If your mortgage lender handles taxes, expect to see a prorated amount on your closing statement.

Real Estate Transfer Taxes: The Fine Print

A real estate transfer tax is essentially a fee paid to the government for transferring the property title. Whether the buyer, seller, or both pay this tax depends on local market norms. In Pennsylvania, for instance, the median transfer tax is 1% of the sale price, but it can be higher in certain cities, for example in Luzerne County, Wilkes-Barre, Kingston, Pittston and Hazelton.

Want more details? click here  transfer tax chart for Pennsylvania.

Selling a Second Home or Investment Property?

The capital gains tax exemptions mentioned above only apply to primary residences. If you’re selling a vacation home or rental property, here are some strategies to reduce your tax burden:

1. Convert It to a Primary Residence: Live in the home for at least 2 years to qualify for the exemption.

2. 1031 Exchange: Roll your profits into another investment property within 90 days of selling to defer taxes. This process requires precise management, so consult a professional.

How to Calculate Capital Gains Tax

If you’re not eligible for exemptions, calculating your tax liability can help you prepare. Here’s a quick breakdown:

1. Cost Basis: This is the original purchase price plus the cost of any improvements. For example, if you bought the house for $300,000 and spent $50,000 on upgrades, your cost basis is $350,000.

2. Net Proceeds: Subtract closing costs and commissions from the sale price. If you sell for $500,000 and pay $30,000 in fees, your net proceeds are $470,000.

3. Taxable Profit: Subtract your cost basis from the net proceeds. Using the example above, $470,000 - $350,000 = $120,000 in taxable profit.

At a 15% tax rate, you’d owe $18,000 in capital gains tax.