When you sell your house, you may have to pay taxes on the profit. The amount of tax you owe will depend on the gain you make on the sale, your filing status, and the state in which you live.
In California, Arizona, and Nevada, the gain on the sale of your home is taxed as capital gains. The capital gains tax rate is 15% for most taxpayers, but it is 20% for taxpayers in the highest tax bracket.
To calculate your capital gains, you will need to subtract the adjusted basis of your home from the sales price. The adjusted basis is the original purchase price of your home, plus the cost of any improvements you have made, minus any depreciation you have taken.
If you have lived in your home for at least two of the five years before the sale, you may be able to exclude up to $250,000 of the gain from your taxable income. If you are married filing jointly, you can exclude up to $500,000 of the gain.
To qualify for the exclusion, you must meet certain requirements, such as being a U.S. citizen or resident and not having excluded the gain on the sale of another home within the last two years.
If you do not meet the requirements for the exclusion, you will have to pay taxes on the entire gain. However, you may be able to reduce your tax bill by taking advantage of certain deductions and credits.
One deduction you may be able to take is the cost of selling your home. This includes the cost of real estate commissions, closing costs, and any other expenses directly related to the sale.
You may also be able to claim a credit for the state and local real estate transfer tax. This tax is paid to the state when you buy or sell a home.
If you are selling your home, it is important to understand the tax consequences. You should consult with a tax advisor to determine how much tax you will owe and whether you qualify for any deductions or credits.
Here are some additional tips for selling your home and minimizing your tax liability:
- Live in your home for at least two of the five years before the sale. This will allow you to exclude up to $250,000 of the gain from your taxable income.
- Make improvements to your home. The cost of improvements can be added to the adjusted basis of your home, which will reduce the amount of capital gains tax you owe.
- Sell on Seller Finance: Not only can you make up to 10x more your asking price, but also becoming the bank reduces tax liability drastically, unless you are doing a 1031 exchange, this is the best option by far.
- Consider selling your home to a qualified buyer. Qualified buyers, such as first-time homebuyers and low-income homebuyers, may qualify for tax breaks that can reduce the amount of capital gains tax you owe.
By following these tips, you can minimize your tax liability when you sell your home.