Unknown to many people, the proceeds from selling a house might be taxable. However, this article sheds light on the mode of operation and simple ways to avoid ending up with a huge tax bill.
What a nice feeling to have a buyer willing to pay good money for your house. Watch out, however, as Uncle Sam will also want a slice of the cake. This is because capital gains on properties like real estate are taxable.
Here are some legal ways to reduce or avoid taxes when selling your house
Capital Gains Tax: How Does it Work?
According to Uncle Sam and many states, the basis of accessing the capital gains tax is the difference between your cost price for acquiring an asset and your selling price.
Capital gains taxes apply to investments like bonds, stocks, and tangible assets like cars, ships, RVs, and real estate.
For real estate, the good news is that Uncle Sam allows taxpayers to exclude as much as
250,000 USSD of capital gains on real estate for single people
Married people can deduct up to $500,000 of their capital gains tax if they are filing jointly. For instance, if you bought a house at $250,000 and sold it for $950,000 after five years, your gain is $700,000. For married people filing jointly, the first $500,000 will not be taxed, but the $200,000 left will be taxed.
On the other hand, there is a “not so good news" about capital gains when it comes to real estate. There are cases in which the exclusion will not affect. This means that you will pay taxes on any of the entire gain if any of the following is true:
The house you are selling is not your primary residence.
Your ownership of the house was less than two years in the five years before it was sold.
Your living in the house during the five years before the sale was less than two years. This, however, does not apply to disabled people, military men, or people in the intelligence community.
You sold a house in the last two years where you already claimed either the $250,000 or $500,000 exclusion before selling this home.
The purchasing of the home happened through a process known as like-kind exchange (Same with 1031 exchange, which involves a swap)
The expatriate tax binds you.
If, after selling your house, you will have to pay taxes on some or part of the money, you need to decide the capital gains tax rate that applies to your specifications.
Short term capital gains tax rate: this applies to people that own the asset for less than 12 months. This rate is the same as the tax rate of your ordinary income or your tax bracket.
Long term capital gains tax rates: if you own the asset for more than one year, this typically applies. The rates are less stringent, and many people could fall in the 0% tax rate. It is a factor of your income and filing status.
Avoiding Capital Gains on the Sale of a Home
Here are simple and legal tips to avoid paying tax when you sell your home
Live in the house for at least two years.
The years do not have to follow one another, although house flippers should be careful. Selling a house that you didn't inhabit for at least two years will make the gains taxable. It is more expensive to sell a home within a year as the short-term capital gains tax could apply to you, which is a higher rate.
See if you can claim an exception.
The presence of a taxable gain on the sale of your residence does not mean you won't be able to claim some exceptions. There are publications from the IRS that reveal that you should claim deductions due to health, unplanned events, etc.
Your Home Improvement receipts can help.
Your home's cost value is not centered entirely on the dollar value you used to buy it. It also includes the relevant improvements that have gone into the house over the years.
If you have a higher cost basis, it will reduce your capital gains tax. Examples of things that can lower your capital gains are fixing a new garage door, expansions, landscaping, remodeling, a new driveway, etc.
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