Relative to the amount an individual spent to acquire an asset, capital gains occur when that person sells it for a net profit. For example, if you sell a stock for $1500, but you bought it for $1000, the capital gain would be $500.
It’s a different matter, however, when selling a home. For many home sellers, a capital gains tax exclusion may apply. When it comes to the tax on a home sale, there are special rules that apply when you sell an investment property, vacation home, or a primary home.
So, if you sell your house, when will your taxes be due? Do you have to pay taxes? Before you sell your house, consider the following information.
When You Sell a House, Do You Have to Pay Taxes?
You’re selling your house. If you get significantly more for it now compared to what you paid for the house, will you owe the IRS taxes? Answer: Possibly. There is exclusion though:
Home Sale Gain Exclusion: As much as $500,000 in capital gains can be excluded from taxation if you file a joint tax return. Upon sale of a primary home, this would also mean that as much as $250,000 could be excluded by a single filer.
How to qualify: For at least two of the last five years, the home needs to have been considered your primary residence. What’s more, for the last five years, during at least two of them you needed to actually own the home.
One more thing: Within the two years before you sold this home, you’re not allowed to have claimed another home exclusion.
When Are My Taxes Due?
Ordinarily, when you file your tax return, this is the time when you pay taxes. For example, your taxes would be due on 15 April the year after you sold your home. Check with the IRS, however, because “estimated tax payments” may be required. A smart move is, as soon as the sale closes, send the IRS your estimated capital gains tax. When tax time rolls around, this could save you writing a big check.
However, rather than sending a lump sum to the IRS, throughout the year, you might want to increase your withholdings. If you need all of your home sale proceeds, this might be a better idea. Say, for example, on your next home, you needed a sizable down payment. To figure out which of these options is best for your circumstances, it’s best to consult a professional.
Note: None of the information above should be considered to have been provided by a tax expert. Anytime you have a question about taxes and real estate, your best bet is to consult a CPA, professional tax preparer, real estate lawyer, etc.
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