The market has been hot for about a year now. People are still buying and selling homes at a record pace. It can be a wonderful thing to sell a home. You can upgrade, change cities, downgrade for the money, or take advantage of a number of other opportunities. If you are looking to cash out on your home and make a big move, you should be aware of the tax implications.
The standard tax rates
According to the IRS tax code, home sellers are responsible for paying capital gains tax on earning resulting from the sale of that home. Capital gains tax rates vary depending on an individual’s income.
Here are the 2021 tax guidelines people filing as “single”:
- Annual income of <$40,400 = 0% tax;
- Annual income of $40,400 – $445,850 = 15% tax;
- Annual income of >$445,850 = 20% tax.
If you are filing as “married filing jointly”, here are the rates:
- Annual income of <$80,800 = 0% tax;
- Annual income of $80,800 – $501,600 = 15% tax;
- Annual income of $501,600 = 20% tax.
If you are filing as “married filing separately:
- Annual income of <$40,400 = 0% tax;
- Annual income of $40,400 – $250,800 = 15% tax;
- Annual income of >$250,800 = 20%.
If you are filing as “head of household”:
- Annual income of <$54,100 = 0% tax;
- Annual income of $54,100 – $473,750 = 15% tax;
- Annual income of >$473,750 = 20% tax.
If you are someone who owned the home for less than a year, you could be liable to pay short-term capital gains tax which can be upwards of 37%.
Tax exemption
The Taxpayer Relief Act of 1997 offers an exemption to people that meet certain criteria. You have to pass both the “ownership test” and the “use” test. This means you have to be the owner AND live in the house for at least two of the five years preceding the sale of the home. You may be able to get the 5-year period extended if you were active military and away from home.
Additionally, you cannot claim the exemption more than once in a 2-year period. Lastly, if you agreed to an installment sale, you could still be eligible for the tax exemption.
If you qualify for the tax exemption
So, you know where you land as far as tax brackets, and you qualify based on the “ownership test” and the “use test”. What do you “win”?!
If you are single, you may be exempt from ALL taxes on up to $250,000 profit. If you are married filing jointly, the exemption extends up to $500,000.
Keep in mind that you may still have to pay tax to your state as this exemption is only applicable to federal taxes.
Taxes can be scary. If you are thinking of selling your house and you are concerned about the tax implications, you need the experience and guidance of an attorney. Elias Dsouza of Dsouza and Strachan Law Group has that experience. Get informed today by requesting a free consultation.