What Are the Taxes for Selling a Home?
The taxes for selling a home are the capital gains tax on the income earned from the sale and the excise tax on the transfer of property from seller to buyer, though they will not apply in all cases.
Governments around the world tax economic activity to fund the public infrastructure and services on which it depends. As an asset that can hold value and generate income, real estate is no exception.
Real estate taxes are most commonly associated with the yearly payments homeowners make on the value of their property. Some taxes are levied only at the time of sale, however.
In this blog we will review the taxes you may need to pay for selling a home.
Capital Gains Tax
Most governments tax income. If you sell your house for more than you bought it, the difference is a type of income. This is the principle of the capital gains tax. Though, things usually work out a bit differently in practice.
First of all, the income you earn on your house is not the simple difference between purchase price and selling price. For tax purposes, it is the difference between cost basis and net proceeds. Cost basis is the cost of purchasing your home plus any upgrades you have made as the owner. Net proceeds is the money you earn from the sale minus the commission and other selling expenses.
The use of cost basis and net proceeds better reflects the true income from your home sale and reduces your tax burden.
The second thing to know about the capital gains tax is that it does not apply to all income earned from the sale of your home. According to the IRS, you are exempted from paying capital gains taxes on the first $250,000 of income generated from the sale of your house, if you have lived in it as your primary residence for two out of the last five years. As a married couple, you and your spouse together are exempted from $500,000 in income. The result is that only the most profitable home sales require a capital gains tax payment.
Capital gains are taxed by the federal government and 41 states.
Some states also impose a tax on the transfer of real estate from one owner to another. This is known as an excise or transfer tax.
The real estate excise tax can be thought of as a fee to cover the administration costs of registering the deed. Some excise taxes also fund public works and other initiatives, however.
In general, the tax is paid as a percentage of the final sale price. The percentage varies by state. For example the state real estate transfer tax in Delaware is 2.5 percent. Counties may also impose their own additional transfer tax. In contrast, Arizona charges a flat $2.00 fee for real estate transfers.
Five states (Mississippi, Missouri, New Mexico, North Dakota, and Wyoming) charge no real estate excise tax at all.
In most cases, the seller is liable for the transfer tax, though it is not uncommon for the buyer to pay some or all of the tax as part of closing negotiations.