When it comes to selling a home, earning a profit out of it can also involve tax payments and benefits. Payment of taxes can range from the profit made by selling the house up until tax qualifications and reduced exclusions. Awareness of such terms may save you, the seller, the hassle of shock and frustration as to out of the blue shell out of pocket money.

To let you be more oriented about some of the taxes needed to be paid when putting your house on the market, here are some of the details you might need to be aware of.

Capital Gains Tax

This is probably the most inquired question amongst all sellers, whether they would be paying taxes on the profit they made in selling their home. The answer is, it varies. The grounds for paying taxes on profit depends on how long the seller owned and lived in the home prior to sale. The profit acclaimed from the purchase of the new homeowner also applies to the criteria.

If the seller lived in the place for more than two years before the sale, there is a tax-free up to $250,000 profit. This doubles if the seller is married and had filed a joint return, summing up to $500,000 tax-free profit.

Along the lines of this concept, this could also be excluded. The law allows exclusion of tax if the house is a primary residence and has been lived in for more than two years, and haven’t claimed the exclusion on another home in the last two years. Any amount exceeding the tax-free profit ($250,000 per entity) can be considered as a taxable capital gain.

How Does it Work?

When it comes to calculating the gain or profit of the house on sale, the capital gain is determined through a cost basis and net proceeds. Cost basis is the average of the amount paid in accordance to purchasing the home and inclusion of its renovations. In the formula, this is the original house price plus the amount used for other expenses (i.e., origination fees, major and minor renovations, and refurbishments)

Net proceeds, on the other hand, is the difference between the price of the seller’s house on sale minus the real estate commissions (if there is a listing agent involved). Real estate agents usually take 30% of the house price as their commission. However, the Internal Revenue Service (IRS) has also provided a detailed list of inclusions regarding expenses that can or cannot be included in the cost basis.

How Much is the Capital Gains Tax?

As said above, any amount exceeding the single file of $250,000 or joint file of $500,000 is considered a taxable capital gain. The amount taxable depends on the income of the seller and how long he or she owned the home. The IRS classifies this into two categories: Short term and Long term.

A short-term capital gain is for those who owned the house for less than a year. On the contrary, long-term capital gains occur when the home is owned for more than a year. This creates more favor on long-term capital gains since the short-term taxable capital gain is the same as an ordinary income (based on the seller’s marginal tax range).

Conclusion

Overall, capital gain taxes are the sole tax provider for home sellers. With this in mind, it is essential for you to know the in and out to be able to secure an organized profit outline and save you the hassle of unawareness and piled up bills to pay. This is also a good question to ask your real estate agent (if there is any) to help you be more educated regarding the topic. We buy houses so we can inform you about the taxes you need to pay when selling a house.

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