Taxes On Net Profit: Taxes on Selling a Home
Taxes On Net Profit
Taxes On Net Profit | Most home sellers do not need to pay capital gains taxes. Some of them do not require to report the transaction as long as they qualify for the exclusion.
If you pass the residence and ownership test as prescribed by the IRS, you wouldn’t be paying taxes on profits up to $ 250,000 filed single and $ 500,000 filed jointly.
In certain situations, you may incur capital gains taxes. It is always preferable to consult a tax specialist when you plan to sell the home.
Let us discuss a few key points on taxes on profits from selling a home.
Types of Taxes on Selling a Home
Some home sellers will incur taxes on profits made from selling their homes. There are three types of taxes that you may owe the IRS.
- Capital Gains taxes
- Property Taxes
- Real Estate Transfer Fee
Capital Gains Taxes
If your profits on selling a home exceed $ 250,000 filing singly or $ 500,000 when filing jointly, you’ll owe capital gains taxes.
Many home sellers meet the qualifications and exemptions so that they do not need to make capital gains taxes at all.
You’ll need to pay property taxes on a prorated basis at the closing. Although the buyer will take over the property taxes once the deal is closed.
Property taxes vary by state, make sure to check the property tax rates and consult your tax professional to get advice on it.
Property Transfer Tax
Commonly known as ownership transfer tax is levied upon at different rates in different states. You’ll need to pay the property transfer tax at the deal closing as well.
Taxes on Net Profits from Selling a Home
First, you’ll need to calculate net profits (or losses) from the sale proceeds. Your net profit or loss can be calculated on a cost basis.
For example, you bought a house for $ 200,000 and you incurred qualified home improvements and renovation costs of $ 30,000. Your total cost will be $ 230,000. If you sell the house for $ 260,000, your net profit will be $ 30,000.
If your profit from the house sale exceeds $ 250,000 (or $ 500,000 for joint filers), you’ll owe capital gains taxes with the following tax brackets:
- 0%: for profits up to $ 40,000 single, $ 80,000 Joint, and $ 53,600 as head of household.
- 15%: from $ 40,001 to $ 440,450 single, $ 80,001 to 496,600, and from $ 53,601 to $ 469,050.
- 20%: above profits on limits mentioned above for each category.
You wouldn’t pay any taxes on that profit if you qualify for the exclusion as explained below.
Qualification for Tax-Free Gains on Selling a Home
You’ll get the capital gains tax exclusions if you meet the IRS qualification criteria.
- You owned the house for at least two years out of the last five years.
- You used the house as the primary residence for at least two of the last five years.
If you pass the ownership and residence tests, you can qualify for the exemption. The two-year term does not need to be concurrent. However, the condition means you cannot claim exemption twice within two years.
Taxes on Selling a Second Home
The IRS tax exclusions are limited to the sale of the primary residence only. If you sell any other house or property, you’ll incur taxes for any profits.
Pro Tip: You can move to your second house to make it a primary residence. It will make you eligible to sell the second home to deduct capital gains exemptions.
As a professional tax consultant, we can help you plan further tax exemptions and deductions.
Tax Deductions to Reduce the Tax Payable
There are different types of deductions and exemptions available to reduce your tax burden from profits on selling a house.
Some of the widely used tax deductions include the following.
- Selling Costs including real estate agent fees, escrow costs, advertising costs, etc.
- Home Improvements and Repairs related to the primary residence only.
- Mortgage Interest deduction on an itemized basis.
- Capital Gains Tax Exemption as discussed above.
- Property Tax deduction limited up to $ 10,000 maximum.
Consult a Tax Specialist
Taxes On Net Profit |Tax planning and preparation can save you money on taxes owed on profits from selling a house. We can help you through the process as a tax specialist.
In some cases, you don’t need to file for capital gains taxes. In other, you can reduce the tax liability by applying for tax deductions and exemptions properly.
- Tax tips to keep in mind on income taxes and selling a home | Internal Revenue Service (irs.gov)
- Sale of Residence – Real Estate Tax Tips | Internal Revenue Service (irs.gov)