Real estate property taxes can impact your monthly mortgage payment or any gains on sale, but many home buyers or sellers forget to consider them when deciding whether to buy or sell. Everything you need to know about real estate taxes in Washington, D.C.
Local real estate taxes, property taxes, and capital gains may not be as fun as picking out carpet, but they’re something that people in the housing market should ignore. Property taxes could increase your mortgage payment significantly if you’re buying. If you’re selling, you want to keep as much profit in your own pockets as you can.
When trying to reduce a potential tax burden or maximize what you get for your down payment, talk to an accountant or finance professional. Your local real estate agent can also offer input, particularly about upcoming tax levies or ballot issues in your area. Here is an overview of real estate property taxes in Washington, D.C to get you started.
Will You Have to Pay Taxes When You Sell Your Home in Washington, D.C.?
Federal taxes, especially with all the recent changes, might be on your mind if you’re thinking of selling your home. You might be concerned about paying taxes on your profit on the sale. The good news is that you’re unlikely to make enough money selling your home to incur a tax burden.
Capital gains taxes are applied to the amount of money you make over what you paid for an asset. The rate you’re charged depends on how long you owned the property and other factors. Unless you made gains above $250,000 for a single person or $500,000 for married couples, you don’t have to worry. Any profit from selling your home will be exempt from capital gains taxes.
You must meet a few other qualifications to qualify for exemption. You can only take the exemption if the home was your primary residence for at least two years by the time you sell it. And you must have been the house’s owner, so a home you were living in but your parents owned would not be exempt. If you sold a home before buying your current property, you can’t have been excluding that gain on sale on your taxes for the past two years.
Washington, D.C. follows federal guidelines for excluding gains on sales of property. If you do not meet the requirements for an exemption you could pay anywhere between 15-20% of your gain on sale in taxes.
How Much Are Real Estate Transfer Taxes in Washington, D.C. (and Who Pays Them)?
A real estate transfer tax, or stamp tax, is sometimes charged by government authorities when a house is sold. In Washington D.C., it’s called the transfer and recording tax. The taxing authority calculates it off the home’s purchase price. In Washington, D.C., it can be paid by either the buyer or seller or both. This is likely something you’ll negotiate while drawing up a purchase agreement.
For home sales less than $400,000, the transfer tax rate is 1.1%. Sales above that amount are charged 1.45% of the home’s purchase price. If you’re a first-time home buyer in D.C. and the home you’re purchasing is less than $332,000 you will be exempt from the recording tax.
How to Calculate Property Taxes in Washington, D.C.
Property tax rates are usually a combination of your home’s assessed value and local levies for the schools, fire, or police departments. In Washington, D.C., the effective property tax is 0.56%, with taxes on a $250,000 home being $1,430.
In nearby Loudon County, property taxes on a $250,000 home would be $2,875. Variations between the effective tax rates in different counties will impact what you in taxes for the same house if it’s in a different zip code. As this will impact your monthly mortgage payment, discuss property taxes in your target cities with your realtor.
The county assessor in the District of Columbia uses an annual assessment cycle. While the office uses a mass appraisal system, they may also visit your property to confirm exterior features and building sizes. D.C. also annually resets the rate you’ll be taxed on your home’s value.
Property taxes should be included when calculating the overall cost of your new home. When evaluating options and trying to decide between multiple properties, discuss property taxes with your agent.
Tax Breaks for Washington, D.C. Home Buyers & Sellers
If you plan ahead you can take advantage of some tax breaks when you buy or sell a home in Washington, D.C.
Tax Breaks and Credits for Buyers
Washington, D.C. and federal government offer tax breaks to home buyers. Many are based upon income or residency qualifications.
Washington, D.C., offers a homestead deduction which is limited to residential property. If you meet the program requirements you can submit a form to have your property taxes lowered. D.C. will also cap and reduce property tax rates for long-term homeowners who’ve owned their homes for seven or more years. This is to offset the impact of quickly rising home prices in the D.C. area.
The district also has a program in place to help low-income families afford their homes. The low income homeownership tax abatement reduces property taxes for owner-occupied homes of families who meet the income requirements. The property can’t be worth more than $356,000 in value.
Mortgage interest is still deductible on your federal tax return, though the first-time home buyer tax credit has now expired. In 2018, the government set new principal limits that only allow homeowners to deduct interest paid on mortgages with a total principal of less than $750,000, or $375,000 for couples married but filing separately.
Tax Breaks and Write-Offs for Sellers
If you’re selling a home in Washington, D.C., to cash in on the jump in property values, it’s important to know about your tax write-offs before you begin the process. They could require documentation and receipts that you will need to set aside during the home sale process.
Keep records of major repairs that were necessary to sell your house, as they could be a tax deduction. If you negotiate with the buyer for any repairs that are revealed after the home inspection, get those requests in writing for the IRS. The key to writing off these repairs is that they must be related to the sale.
Fixing a broken furnace or patching a faulty roof are types of repairs necessary to keep the home functioning. The IRS allows you to immediately deduct them. Work such as a kitchen remodel, done on the house to increase its value, is called an improvement per the tax code. Deductions for improvements have to be amortized over a few years after selling the home.
As long as you owned a home during the year you will still be able to deduct any mortgage interest paid. Don’t throw out the form your lender mails around tax time.
Many home buyers pay points, or interest, up front. Think back or pull out the documents to when you bought the home. If you paid points, your accountant should have been deducting them on your taxes. If you haven’t taken the full deduction yet, now that you’ve sold the home you can deduct the remaining amount on this year’s taxes.
Property and real estate taxes could influence your home buying decision more than you thought. A tax professional can help you plan for minimizing your tax exposure. A qualified realtor will help you maximize your savings if you’re buying a home.
If you have decided to learn more about buying or selling a home in Washington, D.C., talk to a local real estate agent. The agents in the Clever Partner Network come from nationally recognized brands and are top-rated selling or buying agents in your area. They’ll be able to answer any questions you may have about real estate taxes in Washington, D.C.