If you are a homeowner, then you have most likely seen your home’s value soar in recent years. While this is great news, it is important that you are educated on any tax implications that you may encounter as a result of the sale of your property. For many homeowners that sell their properties, they may not realize the tax implications until their tax returns are prepared. By this time, many of these filers may have already spent their proceeds or invested in another property. Needless to say, learning that Uncle Sam wants a healthy slice of your gains is not a pleasant surprise for anyone not expecting it. Understanding how home sale profits are calculated and how you can legally reduce your tax bill could save you money and stress if you’re planning to cash in on the current home price boom.
Tax rules
Until 1997, home sellers didn’t have to pay taxes on their profits if they bought another home of equal or greater value within two years. The tax rules changed however, with the launch of The Taxpayer Relief Act of 1997. Instead of rolling profits from a sale into another home, homeowners can exclude up to $250,000 of home sale profits from their income. For married couples filing their taxes jointly, this benefit jumps up to $500,000. It is important to note that in order to qualify for this benefit, home sellers must have owned and lived in the home at least two of the five years prior to the sale.
Interestingly, the median home sale price when this law was passed was $145,800. Fast forward to 2022 and the median home price for the first three months of the year was $428,700. As for capital gains tax implications for properties that are not your primary residence, short-term or long-term capital gains taxes would apply. Short-term capital gains taxes apply to assets held for a year or less. These gains generally are taxed at the same rate as your ordinary income, ranging anywhere from 10% to 37%. Long-term capital gains are normally taxed at 15% on the federal level, although a big enough profit could push you into the higher 20% capital gains bracket. In addition, state tax rates vary.
Determining your tax base and reducing your gains
When selling your primary residence, you must first determine your total gains realized from the sale. Your realized proceeds should be the sales price minus any selling costs, such as real estate commissions. The next step is to determine your tax basis for the property. This is typically done by adding up the price you paid for the property plus any closing costs and costs of home improvements performed on the property. Below is an example:
You just sold your home for $800,000 in 2022. In selling your home, you paid a total of $48,000 in real estate commissions. You originally purchased the home in 2018 for $300,000 and completed a few remodeling projects including the kitchen and two bathrooms totaling $100,000 in costs. In this scenario, you would take your selling price ($800,000) and subtract your purchase price ($300,000), real estate commissions paid ($48,000), & your home improvement costs ($100,000). The result would equal $352,000 in capital gains. ($800,000 – $48,000 – $300,000 – $100,000 = $352,000)
Assuming that this was your primary residence and you have lived in it for at least two of the five years prior to the sale, you could exclude up to $250,000 of your capital gains from this sale as a single tax filer. Therefore, your capital gains tax liability would be $102,000 ($352,000 – $250,000). In the event that you are married and filing your taxes jointly with your spouse, you could exclude up to $500,000 in capital gains taxes. Therefore, the $352,000 profits from this scenario would not realize any capital gains taxes (since the limit for married, joint filers = up to $500,000).
Summary
As always, it is recommended that you consult your tax advisor for any tax recommendations and/or strategies. Furthermore, it is important to remember that the above example applies to a primary residence that you have occupied for at least 2 of the prior 5 years prior to the sale. Homeowners that may be considering selling their primary homes are advised to learn more about acceptable home improvements to contribute to your cost basis by visiting IRS Publication 523, Selling Your Home. Do you have further questions? Contact Natasha at Live South Florida Realty, Inc. today!
At Live South Florida Realty, Inc. we have assisted many clients with their real estate needs. Are you looking to buy or sell a property in South Florida? Now more than ever, it is critical to have a qualified real estate team and the proper search tools behind you. Live South Florida Realty, Inc., has been a leader in the South Florida market for many years. Let our team of professionals assist you with buying or selling your piece of paradise today! In addition, our recently launched “Florida Home Search” app is now available on the Apple App Store and Google Play Store. With real-time MLS feeds, this app lets you set your own alerts to notify you as soon as a property meeting your needs hits the market. Furthermore, it will also let you know of recent closed sales in your area so that you may be even more educated on the market. Be sure to download this app for your smartphone or tablet today!
