Are you dreading the prospect of paying taxes on the sale of your house in Huntsville? Don’t fret; most sellers don’t have to report this transaction to the IRS. However, there are some exceptions to keep in mind.
Continue reading to find out which home sellers must file with the IRS.
The Two Primary Rules
There are two rules related to the taxation of a property sale, which is known as the “old rule” and “new rule.” The old taxation rule states that up until 1997, anyone over age 50 had the option of excluding $125,000 of gain on their sale if it’s their primary home. The new taxation rule states that anyone of any age can exclude $250,000, or $500,000 for a married couple filing jointly.
Home sale taxes are complicated, and to a person unfamiliar with real estate, the rules may seem arbitrary. In today’s blog, we’ll delve into the complexities of property taxation.
Most Common Questions
Q: Which Homeowners Qualify for Tax-Free Gains When They Sell Their Property?
A: To be eligible for the capital gain tax exclusion on your sale, you must meet the following criteria established by the IRS:
- Pass the ownership test, which shows you’ve owned your house for a minimum of two years
- Pass the use test, which demonstrates you’ve used your house as your primary residence for at least two years. If you rent out your home for a portion of the year, the amount of gain you can exclude will be proportional to how much you use it versus rent it.
- During the two years ending on the date of the sale, you didn’t exclude gain from the sale of another property.
Q: What If I Have Over $250,000 in Gains?
A: The IRS will give you a tax bill for the amount of gains above $250,000, or $500,000 if you’re married filing jointly. However, they will tax it using the capital gains tax rate. To reduce your amount of taxable gains, keep receipts and records of home improvements you’ve made. Fortunately, you can add specific modifications to your cost basis, reducing the amount of reported gain.
Q: What If I Haven’t Owned My Home for Two Years?
A: If you’ve owned your home for a few months, gains over the excludable amount are taxed at a rate similar to your standard income taxes. Conversely, if you’ve owned your home for longer, the capital gains tax rate will apply; this may probably be less than your ordinary income tax rate.
Q: Anything Else I Should Be Aware Of?
A: Bear in mind that if you have a loss, which is when your property is worth less than what you paid in the beginning, you can’t mark it as a tax deduction.
Feeling Confused? Local Home Buyers Can Help
Filing taxes is stressful enough, and if you plan on selling your property, you might be feeling anxious. If you live in Huntsville, Alabama, you can sell your property to Local Home Buyers for a quick, all-cash offer. You choose the closing date, and we’ll pay for all the costs! Reach out to us today.