We Buy Houses Cleveland is always trying to make it simpler and easier to sell a home. We do a ton to help you sell your house fast. We also want to make sure you have important information related to home sales. In that effort, this quick tutorial will explain how taxes work when you sell your home.
Capital Gains Tax
In theory, you pay capital gains taxes on the profits you make from selling your home. In practice, it’s quite a bit more complicated. The short version is that everyone is subject to the capital gains tax, but there are a lot of exemptions and loopholes that can mitigate or eliminate this tax altogether.
We’ll get to exemptions in the next section. First, let’s cover how the capital gains tax works in the absence of any exemptions. The general rule is that you are only taxed on the profit you make from selling your house. A simplified example makes it easy to understand. Say you buy your house for $100,000, and you sell it for $150,000. The capital gains tax only applies to $50,000 of the sale price because that’s how much profit you made.
When you do apply the capital gains tax, it is based on your income. The income brackets range from 0% to 20%. If you make less than $441,450 in a year, your tax rate will be less than 20%. So for whatever bracket you are in, that tax rate is applied to your profit. Assuming you’re in the highest tax bracket in the example above, your $50,000 in profit would be taxed at 20%, for a total tax liability of $10,000.
Now that you understand the basics of capital gains taxes, we can look at exemptions. There is a general exemption for anyone who is selling a primary residence. That means that you have lived in the house you are selling for at least two years. Those years don’t have to be consecutive, and you don’t have to be living in the house at the time you sell it. As long as it is listed as your primary residence and you meet the two-year requirement, you get this exemption.
This exemption applies to the first $250,000 of profit for anyone who files as single with the IRS. For married filers, the first $500,000 of profit are exempt from this tax.
Going back to our first example, you would have to sell your house for more than $350,000 before you would owe any capital gains taxes.
The point of all of this is that capital gains taxes are meant to apply to property sales that aren’t your primary home or that involve very large sums of money. Still, many real estate sales don’t qualify for this exemption. When that is the case, you can move further down this list.
A partial exemption is exactly what it sounds like. Instead of getting the full $250,000 of tax-exempt profit, a partial exemption saves you from some of the tax burden. The amount that you can have partially exempted is based on how long you lived in the house. So if you live in the house for one month but qualify for a partial exemption, you can deduct $10,416.67 of profit before the capital gains taxes kick in. If you live there for a whole year, you can exempt the first $125,000.
To keep things simple, let’s focus on what qualifies you for a partial exemption.
There are four scenarios that get you at least a small tax break when you sell your house. Those scenarios are when you have to move for work, you have to move for health issues, you get a divorce, or you have twins (or triplets or more). If any of these apply, you can explore a partial exemption.
Real Estate Taxes
There are two more taxes to consider. When you sell your house, you have to pay prorated property taxes up to the closing date. You don’t get out of a single day of property taxes. Those taxes will be at the same rate you have already been paying.
The real estate transfer tax is another one to look out for. These taxes are related to the transfer of the home title. Their cost is based on a percentage of the sale price. According to Zillow, in Cleveland, the average transfer tax is $292.Taxes get crazy, but when you simplify everything, it’s easy to know where you stand. You can always work with We Buy Houses Cleveland. We handle all of the closing paperwork and costs to make selling your home easier than ever. When we buy houses, the process is much easier than going through a realtor. Contact us today if you want to sell your house fast, the easy way.