Let’s talk selling your home and taxes. A common question comes up often; How much will I pay in taxes if I sell my home? I always start by asking clients a simple question: “Are you looking to sell your personal home or investment property? Of course the goal is always to defer or avoid paying capital gains taxes, aka reducing your tax liability. So let’s start with the tax liability of selling your personal home. There are a few requirements that you have to meet in order to avoid capital gains tax on selling your personal home.
For your personal home, it all depends on how long you owned and lived in the home before the sale and how much profit you made. The IRS allows you to take a tax free profit (up to $250,000) as long as you owned and lived in the home for two of the five years before the sale. If you are married and file a joint return, the tax-free allowance doubles to $500,000.
So imagine that, for simple numbers, you have a home that you purchased for $100,000 over 10 years ago. You have lived there for the last 10 years and you now decide it is time to uproot and move to greener pastures, aka buy a new home. So that same home could be now be sold for up to $350,000 tax free if you are single or $600,000 if you are married. Now, realistically, the amount you could actually sell the home for all depends on the current market in your area.
Why is that information important? Well, nobody wants to pay a lot in taxes and tax planning is very important when you are talking about selling big purchases. So as to not get surprised with a big tax bill, it is crucial knowledge.
IRS ALLOWS UP TO $250,000 TAX FREE OR $500,000 FILING MARRIED OR JOINT.
What about an investment property? Investment properties have different rules in which you can avoid paying capital gains taxes by deferring taxes. Again the words “defer taxes” means that you are deferring the payment of capital gains by using a 1031 Exchange, not getting rid of it, just putting it off till a later date when you decide to out-right sell. The idea behind a 1031 exchange is simple… When you sell your investment property you never get to touch the profit, you must use a qualified intermediary who will hold your proceeds while you identify and purchase a new property that is worth the same or more than the property you sold. With an investment property, if you take the proceeds yourself, you are now responsible for paying the capital gains on that profit.
Looking to buy or sell? Let’s chat! Shoot us a message or give us a call at 817-730-5250.
Note: We are not accountants or lawyers, but professional Realtors & Investors providing value and guidance by sharing the Tax code. For professional tax planning and advice, please seek the advice of your accountant.
