When the time comes to sell a home, there are several expenses to consider while estimating your profit. Realtor fees are often one of the biggest considerations, but the sale could also have federal tax implications that you will need to work into your calculations.
These IRS taxes are in the form of a capital gains tax.
What Is Capital Gains Tax?
Capital gains tax is applied to any profit made after the sale of your capital assets, such as equities or real estate. Short term capital gains are those coming from assets you have held for less than one year while long term capital gains are held for a longer period of time.
Capital gains tax is the liability set by the IRS based on the amount of profit made.
When You Sell Your House, Do You Report it to the IRS?
If you sold your home for more than you paid and made a profit, you may owe the IRS capital gains taxes. Capital gains tax is not assessed on the entire sale price of a home. Instead, it is applied to any difference between the original home purchase price and what you sell it for.
So, if you purchased a home 3 years ago for $450,000 and sold it last week for $530,000, the amount IRS taxes apply to is the $80,000 appreciation since purchase.
This is why capital gains tax can only be assessed once a property has been sold. The final profit made on the home is the basis for the federal tax liability amount.
What Are the IRS Capital Gains Tax Rates for Home Sales?
Short term capital gains taxes are at the ordinary rate determined by your income tax bracket, generally a maximum of 36%. Long term capital gains taxes are at a lower rate, currently a maximum of 20%.
Since most homes aren’t bought and sold within a year, sellers often pay taxes on home sale profits at long term rates. The exact amount of tax applied to your capital gains is set by the IRS and can be adjusted each year, so it’s a good idea to verify the capital gains rate you will be subject to when you sell your house.
Is Any Profit from the Sale of a Home Exempt from IRS Taxes?
If you are selling your primary residence, up to $250,000 is exempt if you are single or $500,000 if you are married and filing jointly. It’s important to note that this exemption is only available to claim every two years since one of the conditions is that it be your primary residence for at least that amount of time.
However, as long as you can prove you’ve lived in the home for at least two of the last 5 years the property was in your possession, you may be able to qualify, even if it isn’t your primary residence now.
Is the Sale of a Home Ever a Capital Loss Instead of a Gain?
If you sell your home and bring in less than your original purchase price, this is known as a capital loss. Capital losses can also be reported on your taxes but are most valuable when being used to offset your capital gains.
If you have two properties to sell and one will bring in a profit of $100,000 while the other will result in a loss of $40,000, if both are sold in the same year, the loss can adjust your total, leaving you with a total of $60,000 in capital gains.
Only this $60,000 will be taxed even though the profit was technically higher because the IRS is giving you credit for the loss you incurred on the sale of the other property.
What Can You Do If You Sold Your Home and Can’t Pay the IRS the Full Capital Gains Tax Up Front?
Capital gains tax is due when the sale of your home closes, but it can be paid when you file your taxes if you are unable to pay at that time. You may choose to pay the taxes due when you file taxes for the year your home was sold.
Keep in mind, however, that some situations may include penalties if the capital gains amount is high enough to require quarterly tax payments and you wait to pay in full at the tax deadline.
If you are still unable to pay what you owe the IRS when you file your taxes, it is treated as any other tax debt and arrangements should be made with the IRS to avoid additional penalties and fees as well refund offsets. There may be some tax relief options available to you that can help.
The most common payment option in this case is an IRS payment plan or installment agreement to pay off the capital gains taxes in smaller payments spread out over a number of months.
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