Home sellers have plenty of work to do. They need to have their properties listed and marketed. Many sellers are preparing their houses for sale while they’re also researching other homes and neighborhoods that they would consider living in.
Some sales may be subject to income tax. The exact amount will depend on the sale price and other contributing factors. Tax exclusions may be claimed in certain situations.
Selling a home in Utah can take time. The entire process may not be completed for several weeks or months. There are certain steps that need to be taken and different people will be involved at various stages. There may also be unexpected delays or other issues. Patience, persistence and a proactive plan of action can help you succeed
Here are a few things to know about whether or not the sale of your home can be counted as income:
- 1. You may qualify for a capital gains tax exclusion.
- 2. The income received may be considered a long-term capital gain.
- 3. You can't deduct a loss from the home sale on your taxes.
- 4. Cost basis can be included in your capital gains exclusion.
- 5. You may be able to avoid paying taxes on the income from the sale through a 1031 exchange.
- Contact Jackie Ruden Realty Team
1. You may qualify for a capital gains tax exclusion.
Capital gains tax exclusions may be claimed. Up to $250,000 from the sale can be claimed for people filing individual tax returns and up to $500,000 can be claimed by married couples filing jointly.
To qualify for this exemption, you must have owned the house that was sold for at least five years and that property must have been your primary residence for at least two years. You also cannot have already excluded the gain from selling another house within two years from when the most recent home sale was completed.
Capital gains are taxed at zero, fifteen or twenty percent. The breakdown is as follows.
The zero percent rate applies to:
- Single filers with an income of $40,000 or less.
- Married couples filing jointly with a combined income of less than $80,000.
- Married people filing individually with income under $40,000.
- Heads of households with an income that’s less than $53,600.
The fifteen percent tax rate applies to:
- Single filers with income from $40,000 to $441,450.
- Married couples filing jointly with a combined income of $80,000 to $496,600.
- Married people filing individually with income of $40,000 to $248,300.
- Heads of household with income for the year from $53,600 to $469,050.
The twenty percent rate applies to:
- Single filers with income that’s more than $441,540.
- Married couples filing jointly with combined income above $496,600.
- Married individuals filing jointly with income over $248,300.
- Heads of households who earned more than $469,050 for the tax year.
2. The income received may be considered a long-term capital gain.
The gain could be considered a long-term capital gain if you owned the property that was sold for more than a year. A long-term capital gain would be subject to capital gains tax.
The only exceptions would be if the home that was sold was owned for less than five years, it wasn’t your primary residence for at least two of those five years, or if the net proceeds from the sale were less than $250,000 if filing individually or less than $500,000 if filing your taxes jointly as a married couple.
3. You can’t deduct a loss from the home sale on your taxes.
Selling a home at a loss is usually considered to be a personal loss. You can’t claim that loss on your tax return. It’s up to you to decide whether or not you want to sell your property for less money than was initially paid.
There are several reasons why people choose to take a loss on the sale of their house. Some properties may need repairs or renovations that the homeowner can’t afford or doesn’t have time to complete.
Other sellers may be trying to sell a home that was inherited or on behalf of the prior owner who has since passed away. Certain homeowners may need to move their houses quickly due to a change of employment or other situation that necessitates a move to another area.
Selling costs, such as settlement fees, title insurance, and closing costs can be added to your cost basis. Transfer taxes, attorney fees, and realtor commissions can also be added as well. You may want to keep receipts or other records of expenses incurred in any renovations or upgrades that were made to the house.
4. Cost basis can be included in your capital gains exclusion.
To determine your net income from the sale, you should take the cost basis into account. Cost basis is determined by beginning with the original cost of the property, adding the costs of any significant repairs, renovations, or upgrades, and deducting any reasonable casualty or theft losses and any applicable depreciation.
For example, if a house was purchased for $200,000, had $50,000 in upgrades and $20,000 in depreciation, the cost basis would be $230,000. If that house was sold for $300,000, the gain that the seller made from that transaction would be $70,000.
5. You may be able to avoid paying taxes on the income from the sale through a 1031 exchange.
A 1031 exchange is also referred to as a “like for like” exchange. It allows you to put the money that was received from the sale of a home toward the purchase of another similar house. You won’t be able to avoid paying tax on this type of exchange entirely. Any capital gains taxes would be deferred.
Many companies routinely conduct 1031 exchanges to defer capital gains taxes continuously. One stipulation of this kind of exchange is that it must be for investment or business use. You can’t attempt a 1031 exchange on a house that you plan to live in or use as a vacation property.
You don’t have to report the sale of your house if you meet one or more of the following conditions:
- You received a 1099-S form that reports your proceeds from the sale.
- You’ve decided to report any gains that were made from the transaction as taxable. This is true even if you could qualify for an exemption or exclusion on all or part of your proceeds from the sale.
- Your net proceeds from the sale were less than $250,000 if filing as an individual or less than $250,000 if filing your tax return jointly as a married couple.
You may want to consult with a tax attorney or your tax preparer if you have any questions or concerns regarding what to report as income and what amount, if any, can be taxed from the sale.
Any applicable taxes would be due by April 15th of the corresponding tax year. For instance, if your home was sold in September 2020, your taxes will be due by April 15th, 2021. If your house sold in March 2021, your taxes would also be due by April 15th, 2021.
Once the taxes are out of the way, any money left over is yours to do with as you wish. You could set it aside for a rainy day or contribute it to a savings or retirement account. It could also be put toward the purchase of another home or big-ticket item. Whatever you decide, you can rest easy knowing that you can move on from the sale and look forward to the next chapter of your active life.
Contact Jackie Ruden Realty Team
Give us a call today at (435) 272-7710 to set up a time to discuss your current and future real estate goals in regards to buying a home or buying a property in trust. We look forward to working with you to make your goals a reality.