It’s a question that all home sellers have after the jubilation of selling their home: Will there be a capital gains tax on the sale?
There is no simple answer. Whether or not you pay a capital gains tax at the federal or state level depends on a variety of factors, including your location and whether the sale property is your primary residence. There are also ways to offset the costs of your capital gain so that even if you do have to pay the tax, it can be minimized.
There are only nine states without capital gains taxes. They are Washington, Nevada, Texas, Wyoming, South Dakota, Tennessee, Florida, Alaska, and New Hampshire. If you live in any of the other states, you may face state taxes when selling your home.
Your state may allow deductions for federal capital gains taxes (or have other special rules) to lower your capital gains tax rate locally. If you’re selling your property, you should speak to a professional real estate agent about your potential tax obligations.
They deal with property taxes regularly and can share their expertise. They can also guide you to tax professionals if your sale and circumstances are more complicated.
Here is your guide to capital gains taxes on property sold out of state
What Is a Capital Gains Tax?
A capital gains tax is placed on any asset that rises in value over time. You can be taxed on appreciation of value on stocks, antique sales, and even on artwork that increases significantly in price from when you bought it.
In real estate, the estate or seller is responsible for paying the tax once the home is sold. The capital gain is the difference between your sales proceeds and what you initially paid for the property plus many expenditures for improving the home value. But it’s not quite as simple as subtracting the two figures.
In some cases you are allowed to add certain costs, such as realtors fees to the original cost of your home. That is, if you bought your home for $200,000, paid $12,000 in real estate commission when you sold it, and had no other improvement or selling costs, the original cost of your property would typically be adjusted to $212,000.
How Much Is the Capital Gains Tax?
If you sold your home for $500,000 you would not pay capital gains taxes on the entire $500,000. You would only pay the tax on the profit on your home, if it’s above a specific amount.
Many home sellers don’t have to report the sale to the IRS. But it’s important to understand the rules when it comes to reporting taxes and keeping your bill to a minimum.
Under law, anyone can exclude up to $250,000 of capital gains (or $500,000 for a married couple filing a joint return) after the sale of a property. This exclusion is for home sellers who lived at their property as their primary residence for at least two years before the sale.
This exclusion can be used once every two years if you sell a primary residence that you lived in for at least two of the previous five years.
Here’s a simple way to calculate the capital gains on your home. Take the price you purchased your property for and subtracting all of the selling costs (for example the costs for any home improvements and sales commissions).
So, if you bought your property 5 years ago for $200,000, made $30,000 worth of home improvements before selling it for $430,000, your capital gain would be about $200,000. You may also be entitled to other tax breaks to lower your total capital gains amount.
It’s important to keep all of your records and receipts when filing. There are time restrictions about when you must have made the home improvements and repairs. You will also have to provide proof of costs.
In the example above, a single person would not pay any capital gains tax because the gain was below the $250,000 mark. Capital gains taxes are complicated, so it’s always best to speak to a professional real estate agent who can advise you and point you to knowledgeable experts to make sure you don’t pay more taxes than you have to.
What About Rental Properties?
There are many perks to owning a rental property. It can be a great source of regular income. But it also presents tax challenges.
Unlike your primary residence, you will likely face a capital gains tax if you sell for a profit. The tax rate is about 15% for people filing jointly and incomes totalling less than $480,000. It can jump to 20% if your combined income exceeds this amount.
So, whether your rental property is in state or out of state, it is considered taxable as a capital gain and does not fall under the $250,000 exclusion you would have if it was your primary residence.
A good accountant or financial consultant can advise you about how to reduce your tax exposure. You may want to pair the profit or capital gain with a loss in another part of your investment portfolio.
One of the easiest ways to get around the tax, or at least defer it, is by purchasing a “like-kind” property. This allows you to pay the tax when you actually cash out your profit. There are several timing requirements if you employ this option. If you miss any deadlines or constraints, you’ll be on the hook for the capital gains tax.
A Professional Realtor Can Help
If you’re ready to sell your home, there’s no substitute for working with a great real estate agent who knows about the tax implications of real estate transactions.
A Clever Partner Agent will be able to assess the value of your home so that you net the highest return for your hard-earned investment. A professional realtor can also make the entire home selling process easier and less stressful.
Just as importantly, they will help inform you about the details of capital gains taxes. If your situation is more complicated, they are well-connected with real estate tax experts.
Partner Agents are all full-service and are top-rated real estate agents. Clever can connect you with Partner Agents from companies like Keller Williams, Century 21, and RE/MAX.
You can be confident that they understand market trends on a community-by-community basis. They will help you sell your home for top dollar for a fraction of the costs typically associated with a home sale.