House Sale Taxes: A Guide to All of the Taxes Related to a House Sale

p>When you purchase a home, you experience several tax benefits. However, do you know what happens when you sell?

Don’t worry if you don’t; this isn’t something that people do too often. Because of this, house sales taxes are often a mystery to many people.

Theoretically, the taxes applied to a home sale may be significant. Learning more about what to expect will help you prepare for what you have to pay when you sell a home.

Paying Taxes on the Sale of Your House

When selling your house, it may be necessary to pay taxes on the money earned from the sale.

While this is true, some exceptions may result in you paying minimal or no taxes at all. From capital gains taxes to real estate transaction tax and others, you have many tax-related factors to consider when selling a home.

For example, if you maintained a residence in the house for two out of the five years before selling, the initial $250K of profit you make is considered tax-free. If you are married and file a joint tax return, the tax-free amount increases to $500K.

Keep in mind that this refers to the profit, not the income. This means that the tax is determined by the net amount you receive, after expenses, when you sell your house. It does not apply to the whole amount of money you make from the sale.

What this means is if you happen to sell your home for less than $250K more than the price you bought it for, and you have lived in it the specified time period, you don’t owe taxes when you sell.

State Income Taxes

It may be necessary to pay state income taxes when you sell your home. However, this isn’t the case if the federal taxes are exempt.

Since each state is unique, it is best to check with your tax preparer.

Capital Gains Tax

The capital gains tax is mentioned above. If you meet the requirements, you will be excluded from paying this.

It is worth noting that the amount of capital gains tax you pay depends on how long you owned the home and your total income. There are two categories of capital gains, which include:

Short Term Capital Gains

This occurs if you have owned the asset for under a year.

Long-Term Capital Gains

These apply to an asset you have owned for more than a year.

In the situation where you own a home, the sale will likely fall into the category of long-term capital gains.

If you have a home that produces a short-term capital gain, then it will be taxable as ordinary income. It will be classified in your traditional tax bracket.

From a tax standpoint, long-term capital gains receive favorable treatment.

Situations That Complicate Taxes Owed After a Home Sale

In most cases, the process of paying the taxes owed on the sale of a home is simple. However, there are some situations where situations will get more complicated.

Rental Homes

Are you selling a home you don’t live in or that you lived in a decade ago? Have you rented the property for several years, and now you have decided to sell?

Even in situations where you make under the $250K or $500K threshold, you will still have to pay taxes on your sale.

Second Homes or Vacation Homes

In this situation, you will pay taxes too. The home must be your primary residence for you to be exempt from paying taxes.

You Sold Another Home in the Past Two Years

If you sold a different home in the past two years and took advantage of the capital gains tax exclusion, you may have to pay taxes on this sale.

Usually, this is something that is determined by a case-by-case evaluation. You may be eligible for exclusion or at least a partial exclusion.

This is another situation where you should talk to your tax preparer. This will help you know for sure what type of tax liability you will have after the sale.

How to Report the Sale on Your Tax Return

If the profit on the home you sold is less than the total exemption amount, and you meet all the other qualifications, it isn’t necessary to report it on your tax return.

However, if you don’t qualify for the exemption or if you exceed the requirements, the home sale must be reported.

Any profit you make that doesn’t qualify for this exemption; it should be reported on Schedule D as a capital gain.

It is also necessary to report the sale of your home if you get a Form 1099-S. You receive this form when you sell your home unless a professional guarantees that you do not owe taxes on the profit that you earn.

Understanding House Sale Taxes

As you can see from the information here, there are many things to consider regarding house sales taxes. Understanding what you may owe will help you better prepare for what you have to pay.

You should also work with a tax preparer to better understand the taxes you are responsible for. This is going to ensure you don’t experience any surprises after the sale of the home.

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