If you have been following the recent political debate over revenue sharing between the state and localities in Maine, you know that property taxes have been a major source of concern. The NBC affiliate in Portland notes that towns and cities across the state are concerned that the state legislature will leave them a shortfall in their budgets. And that may force many municipalities to raise property tax rates.
Property taxes are only one of the taxes that home buyers need to be aware of before purchasing any property. They can differ radically from state to state and municipality to municipality.
Both home buyers and homesellers need to understand the complex web of tax and legal requirements that go into any real estate transaction. Whether you are buying a home or selling one, it is up to you to make sure you fall the legal federal, state, and local requirements for transfer taxes, property taxes and capital gains taxes.
While all this may sound overwhelming, a trusted real estate professional can help you sift through what you need to know about pay these taxes and a host of deductions that you can use to save thousands of dollars.
Here’s our comprehensive guide to get you started on unraveling the complexities of real estate property taxes and deductions in Maine whether you’re planning to buy a home or sell your property.
Will You Have to Pay Taxes When You Sell Your Home in Maine?
Most homesellers in Maine, like all homesellers across the country, do not need to report the sale of their property. However, if you have capital gains of more than $250,000 or $500,000 as a couple filing a joint return, then the IRS will tax you on some of the gain.
If however, your capital gain is $250,000 or less then you have no federal tax liability on the capital gain. One of the requirements, however, is that you live in the home for at least two years as your primary residence for at least two years before you sell.
To calculate the capital gain on your home, just take the purchase price of the home and take away the costs of selling the property. These costs would include real estate commission fees and any renovation costs that you may have incurred.
So, if your property is your primary residence and it was purchased seven years ago for $100,000, it would have a net capital gain of $100,000 if you sell it for $200,000. If you had spent $10,000 on home improvements, your net capital gain would be $90,000.
How Much Are Real Estate Transfer Taxes in Maine (and Who Pays Them)?
There are five states that do not impose a transfer tax. But Maine is not one of them. The real estate transfer tax in Maine is $2.20/$500. It is assessed as a percentage of the sale price of the property.
Transfer taxes are usually imposed by states, counties, or municipal authorities. This is done when the property is transferred through legal deeds, certificates and titles.
Using the figures above, it is relatively easy to calculate what you will pay in real estate transfer taxes in Maine. They translate to $4.40 for every $1,000 of the sale price. So, if the home sold for $100,000, the transfer tax would be $4,400.
In Maine, this cost is shared between the seller and buyer. It’s important to note that this would also be negotiable in pre-sale talks. So, it’s important to talk to a professional real estate agent about what tax burden will fall on the seller and what the buyer will pay.
How to Calculate Property Taxes in Maine
The importance of property taxes in Maine is notable in the debate highlighted at the beginning of this article. After all, they are the primary source of many functions of municipal governments, and they provide the services (like water and electricity) to the property in question.
Property taxes are what are known as ad valorem taxes. These are taxes which are assessed based on the value of a property. They also vary from region to region, so it’s important to understand how property taxes will be assessed.
But while they are important to the services which help create the quality of life in the neighborhood of the purchase property, the debate in Maine this spring highlights fears their costs may become too expensive for local homeowners.
So, as a home buyer, it is important to understand how to calculate property taxes. Basically, an assessment of the property value would be based by three methods. Your property value may be assessed through the Cost Method, the Income Method, or through a Sales Comparison.
The Sales Comparison is just what it sounds like. The assessor would calculate the value of the property based on what structures are on it and how they sell to similar properties in the community. In the Cost Method, the assessor would calculate how much it would cost to rebuild your property (minus depreciation). And the Income Method is used mainly for commercial building transactions.
Maine’s property tax rate is a bit higher (about 10% more) than the U.S. average. Its effective property tax rate is 1.32%. But in some countries it is as low as 1.2%. That means on a home assessed at having a value of $250,000, the annual property tax would be $3,000.
Tax Breaks for Maine Home Buyers & Sellers
As you can see there are any number of taxes that Maine home buyers and homesellers have to contend with when buying or selling a home. What’s more, not understanding their implications can cost you thousands of dollars, if not more.
There’s good news, however, for people who are thinking of buying a home or selling one. There are also a number of tax breaks and credits. Here are some for home buyers:
The Mortgage Interest Deduction for Buyers
This deduction is for first-time home buyers that allows them to deduct interest payments that they make for mortgages. A Clever Partner Agent can point you in the right direction for more information about these deductions, which can save you hundreds of dollars every year.
Interest on a Home Improvement Loan
It’s not uncommon for home buyers to put in a lot of money into their property when or soon after they buy it. If you take out a home improvement loan, the interest from this loan can also be deducted. Now, it’s important to note that normal upkeep costs and repairs are not covered under this deduction. Only him improvements that increase the value of the property may be deducted.
One of the main forms of tax deductions that you will receive as a home buyer in Maine comes in the form the property taxes you will pay. It may seem like minor relief, but again, if you speak to a professional financial advisor or trusted real estate agent, they will be able to advise you about how to take advantage of a number of deductions and credits that can all add up to a hefty return.
Tax Breaks and Credits for Sellers
There are any number of tax deductions that sellers can use. For example, you are allowed to write off selling costs, including what you pay for title insurance, broker’s commissions, repairs, or inspection fees. Remember, keep all of your receipts prior to the sale. And it’s important to make any repairs within a 90-day window of the closing date. Otherwise, you may not be able to claim the costs when you file your tax return for that year.
Moving Expense Deductions
If you are in the military, there are any number of programs that will help you buy and sell a house. One of the advantages of selling as an active member of the military is a moving expenses deduction. This used to be available to everyone, if they had to sell their home for employment in another town or state. But now, this deduction is only available to those in active service.
The Next Steps
Understanding all of the tax implications and obligations for buyers and sellers can be overwhelming. But you don’t need to try to figure all of this out alone. A Clever Partner Agent can walk you through everything you need to know if you are buying a home or selling one.
They can also point you to professional financial and tax advisors who can let you know about the variety of tax programs, credits, and rebates you may be entitled to as a seller or buyer. All of this can save you thousands of dollars. If you’re a buyer the savings can help you with the initial costs of homeownership. And if you’re a homeseller, they can help maximize your profits.