Selling your home, for most people, is a milestone that you want to get over as quickly as possible to prepare yourself for the next, respectively first, living phase in your new house. But wondering if the taxman would knock on your door? In case you made a profit from the sale of your home, and depending on the applicable tax laws, you may have to pay capital gains tax. Knowing the general pointers about the tax implications of selling your home in Texas can, if anything, help you mitigate your tax bill. Let’s examine them in a Texas installment of a series on What Taxes to Expect When Selling a Home.
The Likelihood of Paying Taxes on the Sale of Your Home
When you go to sell your Texas home, you are likely to receive a significant cash windfall due to an increase in value. However, you will also probably owe some of those profits to the IRS in taxes. Since your home is an asset, it becomes subject to capital gains taxes.
The biggest question at tax time for someone who recently sold a home is whether they’ll have to pay federal capital gains taxes on the profit. In short, capital gains are the amount of money you make from selling capital assets – property like homes, cars, investments, and other high-value items.
It must be borne in mind that the prices of homes went on the rise massively between 2020 and 2022. This means that your home is likely to have gone through significant capital gain. Therefore, you are probably going to have to deal with the prospect of taxes on selling your house.
How Capital Gains Taxes Work
Now, let’s look at how capital gains taxes work and how they apply when selling your home.
When a person sells off a capital asset, capital gains indeed are taxed on the profits that come off from the sale. Furthermore, every object owned and used for personal or investment purposes gets zapped by the IRS in its effort to see things as if they were all capital assets. These taxes are due during the next tax deadline following the asset sale. Stocks, bonds, real estate, or anything else used for investments are some classic examples.
Additionally, the IRS has two categories for capital assets: short-term gain and long-term gain. For any sale involving a home, anything sold within a year of the effective date of the sale creates a short-term gain, while any sale happening more than a year after the actual date of the sale is considered a long-term gain. First and foremost, the tax implications of selling your home in Texas primarily depend on how long you’ve owned the home and secondarily on how much you earn.
“If you have a short-term gain, you’ll be taxed at whatever your normal tax bracket is. A long-term capital gain gets preferential tax treatment and is taxed at a rate of 0%, 15%, 20%, or 28%. These rates vary according to your income and tax filing status. And if you meet certain conditions, you can exclude the first $250,000 to $500,000 from the sale of your home and avoid paying taxes on it altogether.”
How to Avoid Capital Gains Tax
When selling your home, you may indeed be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller.
According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”
For such an exclusion, you’ll have to meet these qualifying criteria . . .
- “You’ve owned the home for at least two years during the past five years before the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
- The home was your principal residence for a minimum of two of the five years before the sale. For those married and filing jointly, both spouses must meet this requirement.
- You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.
If you think you may qualify, be sure to consult a Texas agent. To discover more, call 713-561-5162.
Special Circumstances
Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in Texas. The special qualifying circumstances here include . . .
- Gaining ownership of the home during a separation/divorce
- If your spouse died during your ownership of the home
- Owning a “remainder interest” in the home when selling
- Having your previous home condemned
- Being a service member during your ownership of the home
- Releasing the home in a “like-kind” exchange
Calculating Capital Gains Tax
If, on selling your home, you want to calculate your probable capital gains tax, you will need to determine the cost basis for the home.
The cost basis includes what you spent to buy the home, as well as any money spent on improvements over the years. For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.
From there, you can add up the purchase price of the home minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale. This will yield the amount subject to capital gains tax.
Get Professional Assistance
If this capital gains tax business seems complex and complicated, that’s because it certainly is. So when selling your home, be sure to consult a tax professional and an experienced Texas investor. We can guide you through the basics to help you arrive at the best outcome when you sell your home. So if you have concerns about the tax implications of selling your home in Texas, be sure to contact us at 713-561-5162.