If you’re a property owner, buyer, or seller in Delaware, you need to understand the state’s real estate tax scheme. Here’s your guide to real estate taxes in The First State.
If you’re buying, selling, or already own property in Delaware, you need to know the real estate tax scheme.
Property taxes vary based on what state, county, and even city you live in. Every prospective property owner needs to understand property taxes in their locale in order to know what they can afford.
Keep reading to learn some of the ins and outs of Delaware real estate taxes.
Will You Have to Pay Taxes When You Sell Your Home in Delaware?
When you’re selling property in Delaware, whether or not you have to pay taxes on the sale will depend on a few things. Investment property sellers and those who haven’t owned their homes for at least two years can expect to pay taxes on their gains. But homeowners selling their primary residences who have lived there for at least two years may be exempt from federal capital gains taxes, if they meet the right criteria.
Most people who are selling their primary residence are exempt from paying taxes to the IRS on the profits they make when selling their homes.
To figure out whether you’ll need to pay capital gains taxes on your home sale, you need to determine your gain. The amount considered a gain is the amount you paid for the home, plus the amount of any improvements and renovations, minus the amount you’re selling the property for.
Home sellers who meet the following criteria do not have to pay federal taxes on their gains:
- Owned the home for at least two years;
- Resided in the home as main residence for at least two years;
- In the two-year period after you bought your home, you didn’t exclude the profits from the sale of another home; and
- Profiting less than $250,000 (if single) or $500,000 (if married and filing jointly) from the sale.
If you don’t meet these qualifications, you’ll have to pay capital gains taxes on your property sale. If you recently lost your job, went through a divorce, or had a family medical emergency, however, you may qualify for an unforeseen circumstances exemption.
There are two types of capital gains taxes: one for short-term gains and one for long-term gains. Which tax applies to you and what your tax rate is depends on how long you’ve owned the property and how much money you’re making from the sale.
If you sell your property within one year of buying it, you’ll be charged the short-term capital gains tax. This tax rate is equal to your income tax rate at the time of the sale.
If you sell your property after owning it for more than two years, you’ll be charged the long-term capital gains tax. The tax rate for long-term gains is significantly lower than the tax rate for short-term gains. The exact rate will depend on the specifics of the sale.
Learn More: How to Avoid Capital Gains Tax When Selling a House
Delaware follows the federal rule, so if you don’t have to pay capital gains tax to the IRS, you won’t have to pay taxes to the state, either — with one exception. If you don’t live in Delaware and you sell Delaware real estate, your gains will be taxed at a rate of 6.75%.
Real estate taxes can be complicated, especially when you’re selling property. Make sure you talk to your real estate agent about your potential tax liability.
How Much Are Real Estate Transfer Taxes in Delaware (and Who Pays Them)?
Many state and local governments charge a transfer tax when the ownership of real estate changes hands. Real estate transfer taxes are also known as real estate conveyance taxes, mortgage transfer taxes, documentary stamp taxes, and property transfer taxes. These taxes help fund things like land development and HUD properties and programs.
Depending on where you live, transfer tax may be charged at the state, county, and/or city level. Transfer tax is a set percentage of either the appraised value of the real estate or the final sale price of the property.
Transfer Tax in Delaware
In Delaware, transfer tax is 4% of the purchase price of the property — 2.5% goes to the state and 1.5% goes to the county. The transfer tax is generally split evenly between the buyer and seller, with each paying 2%.
Most first-time buyers in Delaware qualify for transfer tax exemptions. First-time Delaware home buyers automatically qualify for an exemption for home purchases up to $400,000. First-time buyers of property worth more than $400,000 pay 1.25% of the amount of the purchase above $400,000.
Learn More: Delaware Real Estate Transfer Taxes: An In-Depth Guide
How to Calculate Property Taxes in Delaware
Every prospective homeowner needs to understand their state’s tax scheme before getting too far along in the process. After a mortgage, property taxes are one of the largest regular expenses homeowners face.
Property tax is a major source of revenue for state and local governments. State, county, and city governments use property taxes to fund things like public schools, parks, infrastructure, and fire departments.
Your property tax rate will depend on what state, county, and city you live in. Although the bulk of the property tax you pay will likely be to your state government, local governments frequently charge their own property taxes.
Unlike most states, Delaware local governments don’t assess property value on a regular basis. Rather, cities and counties base their property tax on the home value calculated at the property’s last assessment.
Luckily for Delaware homeowners, Delaware has some of the lowest property tax in the country. Overall, the average effective tax rate in Delaware is 0.56%; however, your total effective tax rate will depend on where in the state you’re located.
Delaware property tax is assessed at 0.529% of your property’s value. Add your county and city real estate tax to that, and you’ll have your overall tax rate. For example, New Castle County has a rate of 0.70%, while Sussex County has a rate of 0.33%.
Property taxes can be complex and difficult to understand in the abstract. When you’re assessing the total cost of becoming a homeowner, look to your realtor for guidance. Real estate agents are experts in their fields and can give you a good idea of what to expect.
Tax Breaks for Delaware Home Buyers & Sellers
Federal and state programs offer tax breaks to homeowners, buyers, and sellers. The program or programs that are right for you depend on your specific situation.
Tax Breaks and Credits for Buyers
Governments like to promote homeownership. There are a number of programs that provide tax breaks and tax credits for buyers, especially first-time home buyers.
Delaware offers a special tax credit to first-time home buyers. Essentially, the state allows you to claim 35% of the interest paid on your mortgage as a federal tax credit, up to $2,000/year. The credit reduces your federal tax owed, dollar-for-dollar.
Tax Breaks and Write-Offs for Sellers
There are also deductions for property sellers. One common deduction for home sellers is a deduction for repairs and improvements related to the sale. This deduction allows property sellers to deduct the costs of most improvements and repairs made within 90 days of the sale date.
Property sellers can also deduct discount points,mortgage interest for the time they owned the property, property taxes up to $10,000, and other costs related to selling.
Even within a state, tax liability can vary greatly from place to place and property to property. Property owners, buyers, and sellers should all be sure to seek guidance from a certified tax professional. Professionals will be able to help minimize your exposure and maximize your savings. Your Delaware real estate agent can also help with questions about your tax liability or get you a referral to a tax professional.