I’m Selling My Property...Will I Need to Pay Taxes on My Profit?
It’s no surprise to anyone that the real estate market has been HOT this year which means properties are selling every single day. Sellers are getting stars in their eyes over the potential profit of homes, but a higher selling price doesn’t always translate to dollars in your pocket when you figure in taxes. So when exactly should you expect to pay taxes on a property you’re selling? Keep reading to get all the details.
When it's the home you lived in...
You're likely free and clear of any tax liability in this situation. If you are single and have lived in a house for two of the previous five years, you owe no taxes if you make $250,000 or less in profit. For married couples filing jointly, if both of you have lived in the house for two of the previous five years, then the limit is $500,000 in profit. However, if you were selling your condo in Manhattan for a couple of million, first—you need to invite me over before you put it on the market, and second—you'd likely exceed the $250,000 threshold and have a tax consequence.
When you sell your vacation or second home…
If you sell property that is not your main home (including a second home or vacation home) that you’ve owned for at least a year, you must pay tax on that profit at the long-term capital gains tax rates, which are 0%, 15%, or 20%, depending on your income. And if you sell the home at a loss, sorry, but there’s no benefit from that either.
When it had an income producing component…
When selling your income property at a gain, tax planning is the answer as each case is slightly different. However, if your sale results in a loss, then you’re able to apply it to your taxes on your ordinary income and avoid a big hit. To learn more, visit the IRS website.
When you inherit property…
A lot of factors come into play here. Depending on how the title is deeded and how you came to receive the property will determine who pays what tax. Keep in mind that the $250,000/$500,000 rule described above applies only if you make this inherited property your main residence for at least two years. Assuming that’s not the case, the “stepped-up basis” tax rules apply. This means that the home's cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis (cost + improvements) is its fair market value at the date of the prior owner's death. This will usually be more than the prior owner's basis. And of course, your tax liability is based on the value at the time of death.
Stay tuned for our October blog for more info on this.
