Published December 24, 2020

5 Must-Have Tax Tips When You Sell a House

Staff Writer

Content Specialist at Effective Agents

When it comes to tax-saving tips for selling a house, there is a lot to know. Whether you’re selling your house because you want to up- or downsize, or you’re moving to a different part of the country, the last thing you likely want is to be stuck with a big tax bill. In general, as far as taxes when selling a house, you may have to pay on what you earn from a sale but there are ways to reduce how much you owe or eliminate the taxes altogether. If you lived in your house for two out of five years right before the sale, the first $250,000 profit is tax-free. If you’re married and you file a joint tax return with your spouse, your tax-free profit goes up to $500,000—to reiterate, this is profit, not income. So basically, your tax rate is based on how much you gain when you sell your house, and not on the total you make from selling it. With selling a home, the primary tax issue to understand is capital gains taxes. With capital gains, you have to pay taxes when you sell something for a higher price than what you put into the asset. There are short- and long-term capital gains. Short-term capital gains are gains on those assets you’ve had a year or less. They are taxed at the same rate as your income, such as your wages from work. Long-term capital gains are what you pay on assets you’ve had more than a year, and long-term capital gains rates are lower than short-term rates. Beyond that, the following are some tax-saving tips when selling a house.

Tax Saving Tip #1: Hold Off On Moving

In order to qualify for tax breaks when you sell a house, make sure you’ve lived in the home for at least two years. You need to have owned it for a minimum of two years and otherwise, if you’ve owned it for fewer years you don’t qualify for the primary tax break people use when they sell their house. Additionally, you should know that the home has to have been your primary residence for at least two of the five years, so your rental properties or vacation homes probably won’t qualify. If you’ve sold another home within the past two years, you should also wait to sell your current home, if at all possible. The same tax break detailed above can only be used if you haven’t used it on another home within the past two years. Along with the tax break itself, when you have had your asset for at least a year, you’re paying the more favorable short-term capital gains rates.

Tax Saving Tip #2: Consider Capital Losses and Capital Gains

In a year, your capital losses can offset your gains. This is something that you might see in action and not even be aware of it with tax-loss harvesting, which is something a lot of robo-investing platforms use. What this means for home sellers is that you can use capital losses in years with capital gains to reduce what you owe in taxes. You have to report all of your gains, but you can take $3,000 in losses every year.

Tax-Saving Tip #3: Time Your Home Sale To Coincide with Your Earnings

If you have short-term capital gains losses, then you pay based on your marginal tax rate. If you’re a contractor or business owner and know that you’ve had a year with lower income or you could in the upcoming year, it might also be a good time to sell your house. If you’re about to quit a job or retire, it can also be a smart time to sell your home and offset what you owe in capital gains.

Tax Saving Tip #4: Lower Your Taxable Income

If you utilize general tax-saving strategies, it can, in turn, help you reduce your capital gains when selling your home since that rate is based on your income. If you’re selling your home or you already have, make sure you take advantage of all available credits and deductions. If you’ve been putting off a high-cost medical procedure, perhaps do it before the end of the year, and contribute as much as you can to your retirement account.

Tax Saving Tip #5: Keep Detailed Records of All the Improvements You Make

Finally, when it comes to tax-saving tips when selling a home, make sure you have detailed records of all the improvements or additions you made. This adds to what’s called your basis, and a higher basis means that you pay less capital gain, dollar-over-dollar, when you sell your home. The IRS describes basis-increasing improvements as anything adding to the value of your property, prolonging its life, or adapting it for new uses. Photo credit: francesca-tosolini-Sh22mtTd2GA-unsplash Are you ready to sell your home? EffectiveAgents.com can help you find the right agent, based on data-driven results and their sales performance.

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