There are many tax advantages to owning real estate and there are many tax implications of selling your home. In Nebraska the tax advantages can vary greatly across the state. By working with a local real estate agent you can better understand if buying or selling has tax advantages for you.
Hopefully you’ve earned a good amount of appreciation since purchasing your home, and will earn a healthy profit when you decide to sell. Over the past few years home values have shot up, and in 2018 increased at a national average of 7.2% according to Zillow. That should leave most homeowners with a tidy profit on their sale.
However, taxes can quickly cut into how much you stand to gain. Home sales are often taxed at the federal, state, and local level and in most cases impact the seller more than the buyer. There are also tax advantages of owning a home, which would be lost upon the sale of your home.
Before you decide it is time to sell you should thoroughly review how much you can expect to pay in capital gains tax at the state and federal level, how much you will pay in transfer fees at the state or local level, and accurately weigh these against your current property taxes.
What Taxes Will I Pay When Selling My Home in Nebraska?
First off, the appreciation that earns you a profit when you sell your home is called capital gains. The current federal capital gains tax rate is set at 0%, 15%, and 20% based on your income. For example, joint filers with incomes exceeding $479,000 in income in 2018 will pay a 20% long term capital gains tax on any profit from their home sale.
However, for the vast majority of home sellers there is an exclusion that will save you from paying this tax. Federal tax law allows the first $250,000, or $500,000 for joint filers, in profit to go tax free. This is the capital gains exclusion, but any profit over those amounts will be subject to the long term capital gains tax.
To qualify for this exclusion one must have lived in their home for two out of the past five years, and not have claimed the same exclusion on a primary residence within the last two years. There are some special circumstances that will allow further eligibility, but they are primarily for service members or instances of divorce or death.
The state of Nebraska treats capital gains just like ordinary income. This means it would be included in your state income tax earnings and be taxed between 2.46% and 6.84% based on your total income.
How Much Are Real Estate Transfer Taxes in Nebraska (and Who Pays Them)?
Most states and many local governments also impose a document transfer fee, sometimes called a real estate transfer fee or a stamp tax, on the sale of property. This is typically charged as a fee to recover the cost recording deed changes and other documents that need to be filed with the state or local government agencies.
In Nebraska this fee is imposed at a rate of $2.25 per $1,000 in assessed value. At the average home sale price of $165,000 that would equal a fee of $371.25 due. Typically, this fee is split between the buyer and seller, but can often be negotiated as part of the sale.
The tax applies in most real estate transactions, but there are some exemptions. Exemptions typically include instances when the deed is transferred from a trust to beneficiaries, death, partition of property, mortgage transfers, and other such instances.
Keep in mind there may be local fees that also apply to the transfer of property. Counties sometimes impose a real estate transfer fee, and some cities do as well. Check with your local real estate agent for guidance or local government agencies to be certain.
How to Calculate Property Taxes in Nebraska
Calculating property taxes in Nebraska can be quite complicated. The state technically does not collect property taxes beyond the document stamp fee. Instead, property taxes are levied by counties, cities, school districts, and other local agencies for their needs.
Unfortunately, property taxes are a bit higher in Nebraska than the rest of the country because of their decentralized process. The average effective property tax rate is 1.83%, but again the exact rate varies across the state.
One of the highest counties in the state is Douglas County, the most populated county, where property rates average 2.08%. The lowest is Wheeler County, with a population of just over 800 people, which assess properties .98% of their value.
Each year, county assessors will calculate the market value of your home and then charge you based on that value. Property taxes are usually paid in two installments, which are due in May and September.
An expert real estate agent can help you check with your local county assessor on your specific property tax bill. Additionally, because of the higher property tax rates in Nebraska, the legislature has long debated state tax reform. Be sure to check for any recent state or federal changes as well.
Tax Breaks for Nebraska Home Buyers & Sellers
Homeownership has long come with tax advantages and opportunities for tax relief is available in Nebraska. Of course, federal tax benefits apply. This includes the mortgage interest deduction, $10,000 state and local tax deduction, and the aforementioned capital gains exclusion.
For buyers several federal programs offer home buying support. The Federal Housing Administration offers low down payment options. Veterans have access to a number of programs, and the USDA even offers support for rural buyers and farmers.
The state legislature provides tax relief for homeowners in a couple different ways. The main program is through a real property tax credit that is calculated based on the total assessed value throughout the state. It breaks down to a credit of $86.50 per $100,000 in value for most homeowners.
Essentially, what the state legislature is trying to do is subsidize local governments and schools with money from the state general fund so that they (hopefully) won’t increase local property taxes.
The state also provides a homestead exemption for several categories of homeowners. This offers a reduction in taxable value based on several calculations that compare the value of one’s home with the average value in one’s county. Eligibility is limited to those over 65, disabled veterans and individuals, and individuals with qualifying developmental disabilities.
Again, just like all things tax related, exact local rates and values are highly variable. This underscores why having an expert, local real estate agent is crucial to the home buying or selling process.
Lastly, home sellers also have some tax benefits they can take advantage of when selling their home. Certain repairs and renovations can often be deducted if they were made within 90 days of the closing date. However, be careful when distinguishing whether these are truly repairs or home improvements.
Home repairs are immediately deductible and cover things like fixing the roof, electrical, or other necessary systems. Improvements on the other hand include adding an addition, new deck, or upgrading the kitchen. Deductions on home improvements have to be spread across a depreciation schedule, as they ostensibly have increased your home’s value.
Other deductions during your home sale can include the cost of moving, hiring a real estate agent, inspections, and other necessary fees and services. Be sure to talk to your real estate agent on how to take advantage of these tax savings.
It should be clear that when considering whether to buy or sell your home, taxes can have a big impact. Many deductions, exclusions, and other benefits exist and you should be taking advantage of many of them as a homeowner. These benefits are part of what makes owning a home a great investment.
If you are considering selling your home, working with an experienced, local agent will be crucial to getting top dollar for your home and seeing a smooth transaction. Your agent should be able to help you identify ways to increase your home’s value and take advantage of tax savings throughout the process.
Home buyers should know how to calculate the future tax treatment of any home they purchase. An expert real estate agent should be knowledgeable of all local property tax impacts, and help guide you on what home buying programs can best help you purchase your dream home.
Clever has knowledgeable, experienced agents available nationwide from all major brands and brokerages (e.g., Keller Williams, Century 21, RE/MAX, etc.). Reinvest your potential savings by contacting Clever today!