Real estate transactions come with a host of legal and tax implications. As a home buyer and homeseller, it is your responsibility to make sure you are aware of all federal, state, and local requirements when it comes to transfer taxes, property taxes, and capital gains taxes.
Read on to find out more about the various forms of taxes that may be levied on home buyers and homesellers. Our comprehensive guide also goes in depth into a variety of tax deductions that could save you thousands of dollars whether you’re buying a home or selling one.
Will You Have to Pay Taxes When You Sell Your Home in Kansas?
When it comes to selling your home in Kansas, most homesellers don’t have to report the sale to the IRS come tax time. But there are exceptions, and it’s important to know the rules when it comes to reporting appropriate taxes and keeping your tax bill as low as possible.
The key to understanding your tax liabilities is having a good grasp of the concept of capital gains. Under law, anyone can exclude up to $250,000 of capital gain (it’s double for a married couple filing jointly) after the sale of a home. This applies to anyone who has lived in a home as their primary residence for at least two years before a sale.
This exclusion can also be used every time you sell your primary residence. The only requirements are that you live in the purchase property for at least two of the last five years, and you are not allowed to have claimed the exclusion for another home in the previous two-year-period.
You can calculate the capital gains on your home by taking the price for which you purchased your property and subtracting any selling costs (for example the costs for any home improvements and sales commissions).
So, if you bought your property 10 years ago for $200,000, lived in it, and made $30,000 worth of home improvements before selling it for $430,000, your capital gain would be $230,000 (minus the real estate agent’s commission). You may also be entitled to other tax breaks to lower your total capital gains amount.
In the example above, a couple would be well below their allotted capital gain of $500,000. A single person would also not pay any capital gains tax because the gain was below the $250,000 threshold. But remember, it’s always best to speak to a professional real estate agent who can advise you and point you to knowledgeable experts for further reference.
It must be noted that if your capital gain is more than $250,000 (or $500,000 as a couple), you are subject to either income taxes or the capital gains tax rate will apply. This depends on how long you have owned the property. The capital gains tax kicks in one year after the purchase of a property.
How Much Are Real Estate Transfer Taxes in Kansas (and Who Pays Them)?
States, counties, and municipal authorities may impose transfer taxes on real estate sales. They impose these taxes on the transfer of legal deeds, certificates and titles to a property when a seller makes the sale to the buyer.
This tax is called an ad valorem tax. This is a tax based on the assessed value of an item, in this case the real estate property. In other words, a transfer tax is based on the property value and its classification. In most cases, it is the seller that is responsible to pay the real estate transfer tax.
However, whether you’re a buyer or seller, it is important to speak to a Clever Partner Agent about who will pay transfer tax. It is not uncommon for sellers and buyers to come to an agreement on who will pay and how much. Remember, everything is negotiable in a house sale, and that goes for both buyers and sellers.
The transfer tax is usually assessed as a percentage of the sale price (and in some cases it may be set at fair market value for the property). There are five states that do not impose this tax (Mississippi, New Mexico, Missouri, Wyoming, and North Dakota). In most states, it is set at a rate for every $500 of property value. In Kansas, it is set at $0.26 for every $100 or 0.26%.
Finally, both buyers and sellers must be aware that the IRS does not allow transfer taxes to be deducted. But there are nuances to this allow that allow some specialized deductions. That’s why it is important to speak to your professional real estate agent about what specific Kansas state deductions you may be entitled to as a seller or a buyer.
How to Calculate Property Taxes in Kansas
It is important to understand what property taxes are, who assesses them, and what they are used for. Property taxes are another ad valorem tax. As noted above, that means they are assessed on the value of the property in question. They are a major source of income for state, county and local governments.
Property taxes also vary greatly from state to state, locality to locality, and even neighborhood to neighborhood. The reason for this is because local or state governments determine the level of property tax assessments based on the services they can then pay for in the community.
They are calculated using the value of the property, which includes the land and any structures that may be on it. The assessor can compare your property to other similar properties that have recently sold in the vicinity.
This is called a Sales Comparison. The criteria he or she may use include the state of the property, the overall real estate market conditions in the region, and any improvements you may have made to the structure or property.
He or she may also calculate how much it would cost to rebuild your home using the Cost Method (factoring in depreciation). Or the assessor may use the Income Method, which is used primarily for commercial and business property transactions.
To calculate your property tax, you need to multiply your properties assessment value by the millage rate or mill rate. (It is usually $1 for every $1,000 of a property’s value). The mill rate is usually determined by community or state lawmakers when they determine how much tax revenue will be required for municipal or state services in a given period. That’s why property taxes fluctuate from year-to-year and locality-to-locality.
Kansas has a property tax rate 1.40%. That means the annual tax on a $194,000 home is $2,713 per year. The median home value in the state is slightly below the example above, but at $139,200, your property tax bill would still come out to about $1,952 for the year.
But this can vary greatly from area to area in Kansas. For example, the average tax rate in Atchison County is 1.587%. That means a home assessed in that county at $250,000 would pay about $3,968 in property taxes every year. That’s about $900 above the national average.
How does Kansas compare to other states? It’s actually one of the higher taxing states when it comes to property taxes. Hawaii’s property tax rate is only 0.27%. But its median home value is $563,000. That means it collects about $1,529 a year in property taxes for homes with median property values.
Tax Breaks for Kansas Home Buyers & Sellers
Home buyers need to be aware that there are several federal and state tax deductions and credits for Kansas Home buyers that can save them hundreds, if not thousands, of dollars a year. These include:
The Mortgage Interest Deduction
This allows home buyers in Kansas to deduct the interest from mortgages up to $750,000. The mortgage interest is the interest you pay on your home loan. This fee is a part of mot home loans where the home is the collateral for the mortgage.
One of the bonuses of these tax credits is that they allow the lender the operation to use the estimated tax credit when calculating the debt-to-income ratio. The details of these deductions can be complex and daunting, so it’s best to speak to a Clever Partner Agent about how best to take advantage of Mortgage Interest Deductions.
Interest on a Home Improvement Loan
If you buy a property that needs repairs, you may be able to deduct the interest of your home improvement loan up to $750,000. A qualifying loan under this deduction would be a home improvement loan (not just one for repairs) which adds to the capital improvements of the home. In other words, the improvements must increase the value of the home.
Property Taxes are also deductible from your income taxes on your 1040 Form (up to $10,000). Again, there are fine print requirements to fully take advantage of property tax exemptions, so it is best to speak to your trusted real estate agent for sound advice.
There are also a number of tax breaks for homesellers. These include:
Kansas homesellers may be able to reduce their income tax by the amount of their selling costs. These may include costs for title insurance, broker’s commissions, inspection fees, and any repairs made to the property.
Costs of Home Improvement Repairs and Improvements
If you make any home improvements or repairs to a property, keep good records and receipts. These are generally deductible. But there are time limits. The repairs and improvements usually need to made within 90 days of the closing date.
Moving Expense Deductions
Before 2018, anyone was able to deduct moving expenses if they had to sell their home due to employment elsewhere. This deduction, however, has changed significantly. It is now only for people who are actively serving in the military.
The Next Step
It’s easy to see that the tax implications when buying a house or selling one are extremely complicated. Yet being informed can save put thousands of dollars in your pocket (or keep it in your pocket in the form of tax savings).
That’s why it is highly recommended that you seek guidance from a certified tax professional in order to adhere to any laws surrounding your transactions. A Clever Partner Agent will be able to point you in the right direction so that you can maximize all legal avenues to increase your profits or minimize your tax obligations.