How Do Capital Gains Affect the Home Selling Process?
Selling a home often returns a big profit, which might be subject to capital gains taxes. With this guide, sellers can begin to understand the rules of capital gains taxes and whether or not they may be required to pay them. Is the sale of a house a capital gain? Be sure to consult with a financial expert or real estate agent when selling a property for more help understanding what tax implications of selling a house can apply to a specific home sale.
How Do Capital Gains Taxes Work?
When selling a piece of property, the Internal Revenue Service (IRS) may have a stake in your profit. The profits earned from the sale of property are known as capital gains. Most people who do not own businesses seldom deal with capital gains taxes outside of the sale of a home. The reason is that many personal belongings that can be sold to another person, such as a car, are items that do not appreciate over time. Since homes have the ability to increase in value over time, individuals may have to settle capital gains on the sale.
When Do People Owe Capital Gains Taxes?
The good news is that there is an option for most sellers to exclude much or all of their capital gains from their taxes during tax season. This is called a capital gain exclusion and can help sellers avoid capital gain taxes. Capital gains refer to the difference between what was paid for the home and its current sale price. This means that the difference is the only thing that needs to be considered for capital gains tax liability, not the final sale price of the home. If a seller owned the home for more than two years and lived in it for two years of the past five, they may be able to legally exclude $250,000 or $500,000 of the capital gains from your tax liability, depending on how the seller's file your taxes. People who have not lived in the home for two of the past five years, or who have not owned the home for at least two years, may only be able to exclude a portion of their capital gains.
Do Capital Gains Affect My Ability to Sell a Home?
Capital gains on a primary residence can increase tax liability at the end of the year in which the home is sold, but they should not impede a seller's ability to actually sell the home, whether the residence is in Litchfield Beach or any other part of the United States. If having to sell a home before having owned it for two years, sellers should factor in what the expected tax liability is to be while preparing to sell. Essentially, sellers have to pay taxes on the capital gains proportional to the time spent in the home. For example, if a seller lived in the home for 18 months, they may be able to exclude 75 percent of the capital gains up to the stated limits, since you lived in the home for 75 percent of the minimum qualification for exclusion.
Should I Consider Capital Gains Tax Liability Before Listing a Home?
Since capital gains on a house sale outside of the exclusion are treated like income, sellers should keep them in mind before listing the home. It may be to a greater benefit to wait a few more months before selling, if sellers do not yet meet the two-year requirement. If, in selling the house, the seller expects a profit that exceeds $250,000 or $500,000, the tax liability could discourage you from setting a higher sales price. So, what are the tax implications of selling a house? It may be worth asking an accountant or financial advisor for advice in planning for your taxes the year that you sell a home.
Selling a home may cost more money than you expect, but hopefully capital gains taxes will not be a part of it. If you can take advantage of the exclusion when you sell your home, you will have a lower tax liability.