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Tax Rules When Selling Your Home

Tax Rules When Selling Your Home

June 30, 2022

Selling a home is an exciting yet stressful time for many Naperville area residents. At IntentGen, we provide online resources and tax articles that help make things more efficient and hassle-free. Want to know if real estate taxes apply when selling your house? We have all of your details below! Feel free to contact us if you have any questions. 

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Do Real Estate Taxes Apply When Selling a House?

Buying a home is your biggest purchase and investment, and consider the measures needed to own your dream house. Now, it's time to either downsize or purchase a bigger home, and there are things to consider when putting your house on the market. Many often ask, "does real estate taxes apply when selling a house?"

Your house is considered a capital asset, and there are capital gains taxes to consider. If your home has increased in value, there could be paying taxes on the profit. Because of the Taxpayer Relief Act of 1997, many homeowners are exempt. Single homeowners don't have to pay capital gains tax on the first $250,000 in profit, and married couples can get a $500,000 exemption. Keep in mind that these exemptions are only allowed once every two years.

Capital Gains Tax on Real Estate: How Much Is It?

Homeowners can take advantage of the above exemptions as long as the home up for sale is the primary residence based on Internal Revenue Services (IRS) rules. These rules are: 

  • The homeowner must have lived in the house for at least two of the last five years. 
  • If the home rises significantly in value and you choose to sell the house a year later, you're required to pay capital gains tax. 
  • If you've owned the home for at least two years and meet the residency rules, you could end up owing tax on the profits if it surpasses IRS thresholds.
  • Short-term capital gains are taxed as regular income with rates as high as 37% for high-income earners.
  • Long-term gains tax rates are 0%, 15%, 20%, or 28%, based on income and tax filing status.

The above rules still apply if you choose to turn your rental property into a primary residence since the two-year residency requirement doesn't have to be fulfilled in consecutive years.

Tax Rules When Selling Your Home: Breaking Down the Numbers

Here's an example to make things a little easier. If you purchase a new condo for $300,00 and live in it during the first year. Then you decide to rent it out for the next three years until the tenant moves out, then you've moved back in for another year. After five years, you've decided to sell the condo for $450,000. You don't have to pay capital gains taxes because the profit is only $150,000, which doesn't exceed the exclusion amount.

A different example. You sell your condo for $600,000 and own $50,000 in capital gains tax ($300,000 - the $250,000 IRS exclusive). If your income falls between $40,400 to $441,450, your capital gains tax rate as a single person in 2021 is 15%. 

Learn More About Taxes With IntentGen!

Want to know more about capital gains taxes or tips for selling your home? Visit our online resource center today! We have the information needed to help make your selling experience less of a hassle. Contact us if you have questions.