Big gains = big taxes

The implications of the ongoing real estate boom

This summer, the median home price in the U.S. hit nearly $387,000, up 25% from last year. The typical house sold in just 14 days. In some cities, homes are going for an average of 10% or more over the asking price. It’s hard to imagine a better time to sell a house. But bigger profits can also mean a bigger tax bill.

Most of the time, you have to pay taxes on primary residence sales if your profit is over a certain threshold. Whenever you sell an investment like a house at a profit, you earn what’s known as capital gains — and you’ll likely have to report them to come tax time. The federal government and most states charge taxes on this type of income, and you’ll typically receive a 1099 or 1099-S form after the sale is finalized.

BTW: When you live in Florida, you belong to the few lucky ones: The sale of real property in the Sunshine State is not subject to sales tax. Real property is defined by the land and the “fixtures” permanently attached to the land, like a house, air conditioning condenser, or in-ground pool.

short- or long-term capital gains

The rate you pay in federal taxes depends on how long you’ve owned the home, its value when you bought it, and what the property is worth now. If you turn a profit, your capital gains are classified for tax purposes as short- or long-term. Short-term capital gains tax rates apply if you owned the home for less than a year and are the same as your normal income tax rate. Long-term capital gains tax rates are for homeowners who held their property for longer, and are 0%, 15%, or 20%, depending on your tax bracket.

Special rules apply if you inherited the home, but it’s normally considered a long-term asset. If you’re selling the home you live in, as opposed to an investment property, that does not necessarily represent a taxable gain, due to a special provision from the IRS.

Homeowners can exclude up to $500,000

Homeowners who sell their primary residence and meet certain qualifications can exclude up to $250,000 in capital gains from that sale from their taxes. That goes up to $500,000 for a married couple who file together. Some homeowners may also qualify for special tax treatment even if they don’t meet the broader IRS qualifications. Those include military personnel, newly widowed taxpayers, and people selling due to a work- or health-related move, among other circumstances.

However, the skyrocketing value of homes may push you past that exemption. If you’re a single person who bought a house in 2016 for the then-median value of about $190,000 and sold it today for $540,000, you’d have made $350,000, $100,000 of which would be taxable.

If you just bought a home and are looking to sell it, I recommend staying put for at least a year, until it qualifies as a long-term holding.

And don’t forget about any renovations you’ve made over the years. The money you put into improvements increases your home’s original value, which could decrease the number of capital gains eligible for taxation. Keep good records of such projects and your outlay. All improvements, additions, and renovations completed on the home can be added to the total tax basis for the property. It is common for homeowners who have lived in a property for a long time to renovate rooms or even have additions to them. These are all costs that add to the purchase price and can reduce a potential gain when the property is sold.

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