Will I Owe Tax if I Sell My Home at a Profit?
Buying a home, living in it for a while, and selling it for more than you paid. Thats the dream! This Tuesday’s tip is a few things to know whether you are a home owner or are looking to buy your first place. We talk quite a bit about how to position your home for a quick sale at the best possible price. What we haven’t spoken about yet is what happens when do we help you sell your home for more than you paid. The reason for moving often determines how long you wait between buying and selling. If you are relocating to another area for work or family needs, you probably don’t have the luxury of waiting years. For those that are able to time the sale, this should surely factor into the decision. This is something to be aware of, even if you can’t avoid it!
1. The government has historically had a positive view of homeownership because, in general, it is good for a community. As a result, there are IRS tax rules designed to help homeowners. The one that applies to today’s tip is the “Home Sale Exemption”. The summary of the rule is: If the property has been your primary residence for at least two of the last five years before the sale and you sell at a profit, you don’t owe the capital gains tax that you would otherwise have to pay.
2. This tax is not insignificant either. For most, the rate is 15% of the profit or 20% for couples making $500K or more per year. This is a very simplified explanation of the brackets. For a detailed explanation, visit the IRS website or consult a tax professional. Keeping in mind that this is for example only, lets use some round numbers to bring things into focus. If the home has NOT been your primary residence for two of the last five years and you sell for $10K profit, you will have to pay $1,500- $2K in taxes.
3. If you have lived in the home (as your primary residence) for two years of the last five years, you qualify for the exemption and owe zero capital gains taxes. If you rent out the home to others and don’t live there, the exemption does not apply. If it is an undeveloped piece of land it doesn’t apply. If you live in the home for 22 months you don’t qualify for it.
For selling to make sense, you will probably need to factor this tax into asking price if it applies. Other things come into play as well, like closing costs. If you are thinking about selling, whether or not you qualify for the exemption, we would be happy to sit down and look at the numbers with you. Knowing all of the figures involved makes the whole process a lot less stressful.
If you don’t qualify for this exemption there might be other strategies you can use. Ask your trusted Tax, Legal, or Financial resource if a “1031 Exchange” would work for you.
