It’s almost that time of year… yes, tax season is almost upon us! If you are selling a house in Baton Rouge, you will love these tax tips for selling your home! This article is for informational purposes only.
For specific questions, contact a trusted tax professional, or the IRS!
Not All Profits Are Taxable
I imagine only a few people will read this post, usually when the word tax gets mentioned everyone runs away or falls asleep… I had my coffee today and will try to make it interesting. The cool thing about tax planning is that it can save you a pile of money if you know what you’re doing. And that gets me excited. So, how can you save a pile of money? Keep reading to find out.
As the year comes to an end, you may be trying to minimize your tax bill, and you may be concerned about what selling a house will do to it. The good news is you will be able to exclude a high portion of your house selling profits as long as certain conditions are met. If you are single, your first $250,000 in profit is tax free, and if you are married, that number goes up to $500,000 if you are filing a joint return. If you sell for a loss however, you don’t get to take a write off for that amount.
The deduction is only available when selling your primary residence, so an investment property will not count, unless you lived in it for at least two of the last five years. So, you could live in it for the first year, rent it out for three years, then live in it for another year and qualify. Along those lines, you can only use this deduction once every two years.
It is important that whenever you move, your address is updated with the IRS.
Other Exclusions
If you do not meet the requirements above, you might still be able to exclude a portion of your profits from your income tax. Although, with taxes, whenever there are exceptions, there usually is more paperwork. There are many special conditions you can meet in order to receive a prorated, tax-free gain. If you need to sell because of a change in your health, a job change or other unforeseen circumstances, you will be able to write-off a portion of the profit.
Reporting the Sale
You will need to report the sale if you receive a 1099-S form from the closing agent (Title Company). This form provides the IRS with information regarding the proceeds from real estate transactions. If you know you qualify for the deduction, you can let the agent know at the time of closing that the form will not need to be issued. Even if you are able to deduct all profits, if the form is issued, you will still need to file it with the IRS, even if no money is owed, which is a pain in the butt.
Capital Gains Taxes
If you are selling an investment property or house you have only owned briefly (more than one year but not qualifying for the deduction above), you will likely be subject to the capital gains tax. Capital Gains taxes are dependent on how much you make. If you have a lower income, you will pay no capital gains taxes. People in higher tax brackets can pay upwards of 20%. Short-term houses (less than one year) are typically taxed the same as ordinary income. That impacts us a lot, since we flip some houses. When we flip, we have to pay our income tax rate, which is much higher!
First-Time Homebuyer Credit
Depending on the dates you bought and sold, you might have to pay back all or part of the credit you received. Typically if you move within 36 months of purchasing the home, the credit must be paid back upon the sale of the home. Special rules apply and can be found in Publication 523 from the IRS.
Deduct Selling Costs
Think of your house like a business. Businesses sell goods or services, and have expenses and revenue. When selling your Baton Rouge house, you will be able to deduct any reasonable cost when selling your home. Just like a manufacturer selling a TV, you have marketing costs, commissions, labor to fix the house up, and so on. Keep track of every cent you spend in an effort to sell your home. These expenses can really add up and help you offset your gains when you file your taxes.
No matter what time of the year you sell, it is always important to seek the counsel of professionals. Consult your agent, accountant, and attorney to make sure you are prepared and don’t get stuck with a massive tax bill.
Although there is a lot to worry about when selling a house in Baton Rouge, usually taxes aren’t a big deal.