smithlavis (25) in #nyc • 3 years ago (edited)
Taxes concern everyone. They’re complex and hard to understand for amateurs most of the time. People may compensate for their lack of knowledge by hiring professionals who know the ins and outs of the tax system.
The real estate sector remains one of the most heavily taxed sectors in the United States. Transfer Taxes on the sale of home are only one aspect. There is so much to it that most people would rather outsource the job.
While there is no harm in hiring a tax professional, having some general knowledge about taxes on property sales puts you in a better position when you encounter the scenario.
When you Sell a House do you have to Pay Taxes?
Taxes on a home sale are negligible most of the time, but there are situations when you have to pay tax. It largely depends on how much profit you make from the sale of the property and how long you owned the property. You may also consult with the nyrentownsell team to get more detailed information.
A home sale is tax-free if you made a profit of $250,000 or less and lived on the property between two to five years. In the case of a married active taxpayer, the limit grows to $500,000. By law, you are not supposed to include it in your taxable income. Additionally, if your deal resulted in a loss, you can’t deduct that amount from your gross income.
You can take advantage of this opportunity as long as you qualify; mainly, if the property was used as your primary residence and not as a commercial property for business.
If you make more than $250,000 in profit (or $500,000 as a couple), you will be subject to a property gain tax. Property gain tax is a tax that you have to pay for making a profit on the sale of the home, and it varies depending on how long you’ve owned the property.
How to make the most out of a Tax-Free Bracket?
There are three primary ways you can get the maximum benefit out of being in the tax-free bracket. This is through:
- Ownership
- Primary residence
- Timing
Let’s look at each of these in turn.
You must have owned the property for at least two years before selling the property, but there is no restriction of immediate or continuous ownership before the selling date.
The law recommends that the property is your primary residence for at least two years prior to the date the property sold.
You have not taken advantage of any other residence within two years before the sale of the property.
For couples, you must have filed income taxes jointly and at least one of the partners must be listed as the property owner for at least two years before selling it. In addition, you both would need to have lived in the house for at least two years before it was sold.
Some Exceptions
Besides the above-mentioned rules, there are situations in which you can claim a tax exemption once the home is sold.
If you obtained the property out of a divorce deal, you may consider the time your partner lived or owned the property in order to meet the time criteria.
To meet the criteria necessary for tax exemption by the length of time you’ve lived on the property, you may count short temporary absences. In a divorce settlement, one may claim the length of time the other partner lived in the property as well.
There are few exceptions for unmarried people as well. If someone has to sell their property short of the two year time period due to unforeseen circ*mstances such as job relocation, health issues, or the addition of a new family member such as the birth of a child, the person could still claim the tax exemption.
How much is Capital Gains Tax on the Sale of a Home?
Capital gains are the profit that you make when you sell your property. Capital gains in real estate are considered taxable income. If you don't qualify for that tax bracket, you will more than likely have to pay the capital gains tax. How much capital gain tax will be applied to the profit from your home sale depends on how long you’ve lived at the property and fall into two categories:
Short Term Capital Gains Tax
Long Term Capital Gains Tax
Short Term Capital Gains Tax
Short term capital gains tax applies when the property is owned for a year or less. In that case, the short term capital gains tax rate is generally similar to the federal income tax rate. Based on your tax bracket, short term capital gain tax rates could range from 10% to 37%.
Long Term Capital Gain Tax
Long term capital gains tax is the profit from the sale of property owned for more than a year but less than two years. The rates for long term capital gains tax rates are 0%, 15%, or 20% depending on your tax bracket.
Use the Opportunity Wisely
Even though you may want to take advantage of the government's generosity and claim a tax break, you need to make the decision wisely when trying to avoid paying taxes on profits generated from the home’s sale.
When you own multiple homes, you have to decide which home can generate maximum profit without having to pay the tax on the home sale. Although there is no governmental restriction on the number of times you can take advantage of the opportunity, the flipside is that you can’t claim another tax break within two years after the date of selling your home. Keep this in mind if you decide to take advantage.
