Selling a home can be quite stressful and complicated. From making sure your home is ready for sale, looking for an agent, negotiating with buyers, to finally closing the deal, the process is full of challenges. This is why most sellers make sure that they get the highest profit possible for their property.
However, several things would affect the profits that you net from a home sale. One of the biggest factors is taxes. You have to keep them in mind so you can find ways of bringing down to the barest minimum possible your rate of tax to pay and the amount of money that would be taken away from your home sale profits.
Here are a few of the things that could affect your home sale profits, letting you keep more of your profits or reducing them significantly depending on your circumstances and how you manage them.
1. Capital Gains Tax
The first thing that would significantly affect the profit that you’ll clear from a home sale is the capital gains tax. This refers to the amount of tax that every seller has to pay when their capital asset is sold at a value higher than the price when they bought it.
There are different tax rates imposed on the different classes of assets owned by individuals, corporations, or trusts. Capital gains taxes cover all kinds of assets including real estate properties, investments in shares of stocks and securities, pieces of furniture, collectibles, and including cars and vehicles.
Capital gains tax is one of the main things that will affect your profits as a property seller. In the United States, you can avoid capital gains taxes if the property can be classified as your primary residence. It can be tagged as your primary residence if you’ve been a resident of the property for roughly two years out of the last five years. Those two years of stay don’t have to be continuous.
If you’re single, you can avoid paying as much as USD$250,000 of capital gains taxes when you sell your primary residence. Married couples can keep as much as USD$500,000 for married couples when they sell theirs.
2. How You’ll Use The Sale Profits
Another thing that will have an impact on your profits from a home sale is how you’re going to use the profits. If you have an investment property and you’re planning to sell it because its value has increased substantially and you want to cash in on the price increase, you can avoid paying capital gains taxes through the 1031 exchange by using the profits to buy another property.
It’s basically like claiming you won’t be making any capital gains because you’re just exchanging your current property for another. Suppose you bought a property for USD$750,000 seven years ago and its value has gone up to its current price of USD$1,000,000. If you sold the property at today’s prices, USD$25,000 would be raked off your profits as capital gains taxes.
But if you don’t want a single penny taken from your profits, you can avail of the 1031 exchange.You can say you used the sale profits to buy another property worth the exact same amount of a million dollars. This exempts you from the payment of capital gains taxes for this specific transaction, but you have to do it within the time limit and comply with other IRS guidelines.
3. Your Property Anniversary
Some sellers want to make money through a quick sale when real estate prices go up. But if you’ve owned your property for less than a year, you’ll be paying more taxes when you sell it compared to properties you’ve had for at least one year.
If you’ve owned the property for only less than a year, you’ll be obliged to pay short-term capital gains taxes when you sell it. But if you’ve owned your property for a year or more, you’ll be obliged to pay long-term capital gains taxes. Different tax rates apply to these two properties.
The short-term capital gain taxes can be charged a tax rate as high as 37%. For long-term capital gain, the maximum tax rate is only 20%. Thus, you’ll be paying almost just half the taxes at the long-term capital gains tax rate, if you wait out for your property’s anniversary. That’s quite a significant sum out of your home sale profits which you can keep.
4. Rental Expenses
If you were renting out the property before you sold it, you can claim other deductibles from your tax such as rental expenses and the costs of maintaining it. The IRS guidelines won’t allow you to charge just about any kind of expense for your rental expense tax deductibles. You should consider hiring an accountant if you’ve incurred numerous kinds of rental and maintenance expenses. But here are a few examples to give you an idea about the types of rental expenses you can deduct from your taxes:
· Pest control
· Repairs to maintain structural integrity
· Maintenance and upkeep of the garden
· Repairs of plumbing and fixing of pipes
· Deep cleaning
· Land taxes
· Water rates
Takeaway: Claim Your ExemptionsAnd Exclusions
When you sell your property, it doesn’t mean that you’ll have to pay all of the capital gains taxes. If you qualify under the circumstances and guidelines set by the IRS, you can save a great deal of money by claiming your exemptions. If the property is your primary residence for at least two years, you’re entitled to exemptions, whether single or married. If you’re going to buy another property, avail of the 1031 exchange. You can also save taxes if you wait out a year. If you’ve been renting it out, claim your rental and maintenance expenses and depreciation costs.