Real estate taxes can be complex and difficult to understand, whether you’re buying, selling, or an existing homeowner. To maximize your real estate investment, it’s important to understand your taxes. This is your guide to understanding property taxes in Indiana.
Whether you’re buying, selling, or own property already, your state’s tax system is something that you need to know and understand. The better you know the specifics of tax policy in your state, the more you can maximize your real estate investment.
Property taxes vary based on state and even county, so it’s important to know exactly what you’re getting yourself into as soon as you start looking at homes or thinking about selling. Learning the ins and outs of Indiana real estate taxes will help you ensure that you can afford your dream home and your location for years to come.
Will You Have to Pay Taxes When You Sell Your Home in Indiana?
Whether or not you have to pay taxes when selling property in Indiana depends on a few things. If you’re selling investment property, you can expect to pay taxes on your gains. But if you’re selling your home, you may be exempt — if you meet the right criteria. Luckily, most home sellers do.
Federal Taxes
At the federal level, most people who make money from selling their homes don’t have to pay taxes on the profit; but there are a few exceptions. To calculate what counts as profit, add the amount that you paid for the house and the amount you put into improvements and renovations and subtract how much you’re selling the property for.
There are a few criteria you have to meet to qualify for federal tax exemption from gains when selling your home.
If you meet these qualifications, you will not have to pay federal taxes on your gains:
- You owned the house for at least two years;
- You resided in the house as your 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
- You’re 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 will have to pay capital gains taxes on your home sale. There are two types of capital gains tax, short-term and long-term. Which tax applies to you and what your rate is will depend on how long you’ve owned the property.
If you sell property within a year of buying it, you’ll be charged for a short-term capital gain. The tax rate for this is equal to your income tax rate at the time of the sale. If you own your property for more than two years before selling it, you’ll be charged for a long-term capital gain. The tax rate for long-term capital gains is significantly lower than the rate for short-term gains and will depend on the specifics of your sale.
Learn More: How to Avoid Capital Gains Tax When Selling a House
State Taxes
Indiana follows the federal rule, so if you’re exempt from federal gains tax on your home sale, you’ll also be exempt from state tax.
How Much Are Real Estate Transfer Taxes in Indiana (and Who Pays Them)?
When real estate changes hands, oftentimes state and local governments charge a transfer tax. The transfer tax is a set percentage of either the sale price or the appraised value of the real estate that you’re buying or selling. Real estate transfer taxes can be charged at the state, city, and/or county levels, depending on where you live.
Indiana Transfer Tax
Luckily for Indiana buyers and sellers, Indiana is one of a handful of states that doesn’t have a transfer tax. However, real estate transactions may still be subject to local taxes and tariffs. Be sure to discuss any potential taxes with a local real estate agent or a real estate tax expert.
How to Calculate Property Taxes in Indiana
Property tax is a major source of revenue for state and local governments. State, county, and city governments charge property taxes to pay for things like public schools, parks, infrastructure, and services. The rate at which property taxes are levied varies greatly based on what state you live in and where you are located within that state.
No matter where you are in Indiana, your property taxes will be calculated as a percentage of the assessed value for your property. The exact number you pay will depend on where you live, but overall Indiana’s real estate tax is among the lowest in the country.
Indiana’s statewide average effective real estate tax rate is 0.87% and the average annual property tax paid in Indiana is $1,100, nearly half the national average.
In addition to Indiana state tax, Indiana counties each assess their own real estate tax — and some cities charge real estate taxes, as well. Exactly how much you’ll pay therefore depends on where in the state you live. A homeowner with a median Indiana home value of $144,600 will pay $1,436 (0.993%) annually in Hamilton County, versus $753 (0.521%) in Orange County.
Indiana capps property tax rates at 1% of the value for residential property, 2% of the value for rental property and farmland, and 3% of the value for all other types.
Tax Breaks for Indiana Home Buyers & Sellers
There are state and federal programs that offer tax breaks to real estate owners, buyers, and sellers. Which one(s) you qualify for will depend on your personal situation.
Tax Breaks and Credits for Buyers
There are a number of programs that provide tax breaks and credits for buyers, especially first-time home buyers.
If your Indiana home is your primary residence, you can claim a homestead exemption. Your home plus up to one acre of land can qualify for this exemption, which provides a deduction in your assessed property value. The deduction is either 60% of the assessed value of your home or a maximum of $45,000.
The Indiana Housing & Community Development Authority offers the IHCDA Mortgage Credit Certificate. This program gives borrowers an annual federal tax reduction of between 20% and 24% of their mortgage interest, up to $2,000 per year.
The exact rate of the credit is based on the total loan amount and can be claimed every year for the life of your mortgage, if the home is still your primary residence. This can result in tens of thousands of dollars worth of savings over several years.
Tax Breaks and Write-Offs for Sellers
Don’t worry, sellers, there are tax breaks for you, too. One of the most common deductions for home sellers is for repairs and improvements related to selling their homes. This allows sellers to deduct the costs of most repairs and improvements made within 90 days of their sale date.
Sellers can also deduct their mortgage interest for the time they owned the home, deduct discount points from your mortgage, deduct property taxes up to $10,000, and deduct costs related to selling their home.
Next Steps
Your tax liability can vary greatly from place to place, even within a state. Real estate buyers, sellers, and owners alike should be sure to seek guidance from a certified tax professional (accountant and/or attorney) in order to minimize exposure and maximize savings.
If you need a recommendation for a CPA or tax attorney, ask your real estate agent — local agents are usually familiar with real estate tax experts in their locales and may know many of the specifics themselves.