Selling your house can be an excellent opportunity for you and your family to move on. It can help you find the home of your dreams, but it also brings about some concerns.
One such concern is taxes on selling property. One needs to know many things before they sell their home, including how much tax they will have to pay when they do so.
In this blog post, we will discuss what you need to know about the tax on selling property. Everything from an overview of what it includes, who pays it, why there’s been a policy change recently.
Whenever you’re ready to start the process to sell property, keep on reading.
The History of Property Sales Taxes
There have been several changes in the tax on selling property over time. It used to be that those who sold their home didn’t have to pay any taxes at all!
That’s right – you could sell your house for whatever price you wanted and not worry about giving up some of your hard-earned money as payment.
However, as the country recovered from Great Depression, less disposable income was available. Thus, families needed more help making ends meet.
As such, Congress decided to impose a Federal Tax Code Section 121. This allowed homeowners (qualified) an exclusion or deduction of $250k (now $500k) when they sold their primary dwelling. This is commonly referred to as the tax on property of sale.
However, since one first passed this law in 1934, some changes have been made to it over time. There have even been instances where it has disappeared for years before reappearing again!
For example, between 1965 and 1997, homeowners weren’t allowed to take advantage of Federal Tax Code Section 121. They couldn’t exclude/deduct home sale gains. Thus, they had no choice but to pay taxes on any money earned from the transaction (even if they were exempt under other stipulations).
Then starting in 1997 until 2007 with expiration in 2010, Congress reinstated federal tax code section 121 (aka “tax exclusion”). Thus, sellers who met specific requirements around filing status could exclude or deduct up to $250k. In some cases, even the entire amount if their income was less than a certain amount.
Unfortunately, it has now been announced that this law may expire again on December 31st of this year!
Unless Congress decides to make another change between now and then, homeowners will no longer have the option of FTC Section 121. This could result in them having to pay taxes on selling a property because they won’t meet requirements for other exceptions. So what does this mean?
Well, if you’re planning on selling your house any time soon but haven’t planned financially yet, you’ll want to keep a close eye on the news. Be sure to get your affairs in order ASAP.
Tax on Selling Property In North Carolina
North Carolina residents who sell their homes and earn more than $60k will be required to pay property taxes on the property of sale. The amount you owe in the form of real estate tax depends upon a variety of factors:
How Much Is Your House Worth?
As discussed earlier, this figure can vary depending on location and neighborhoods. Thus, it’s essential to know what price buyers are willing to purchase before making any decisions.
What County Do You Live In?
Sellers’ tax rates may differ from one area/county to another – even within North Carolina!
If you’re looking into purchasing or renting somewhere else, though (or if moving out-of-state), check with that specific jurisdiction about how they calculate the rate and how much you’ll owe.
Is the Home a Primary Residence?
Primary residences offer lower tax rates than second homes on selling property. So if it’s your only dwelling, that could mean an even more significant discount for you!
Just keep records of all utility bills and other destinations where mail is sent to. This will help prove occupancy and use (and ensure this information stays up-to-date).
Of course, some homeowners may qualify for one or more exemptions to help minimize costs. These include homestead exemption, disabled veteran exemption, elderly/over 62 homeowner exemption, etc.
It’s essential, however, to understand the specific qualifications of each category. This is because they do vary from one jurisdiction to another.
Saving Money When Selling Your Property
Even though the tax on selling property is something many sellers like to ignore, it’s not always a bad thing. You can use this as an opportunity to save money by taking advantage of various deductions and credits available such as:
Home Office Deduction
Suppose your primary business or work is at home (for those who run their own businesses/jobs from there). In that case, you could be eligible for significant savings, and this might even include eliminating any need to pay taxes on selling property!
Just keep track of square footage used in dedicated areas vs. shared spaces and other details required by the IRS. Keep documentation that supports these numbers and how they were calculated.
VA Funding Fee
This isn’t a credit or discount but rather an amount of money that home buyers must pay by those using a VA loan to purchase the property.
It’s typically calculated as a percentage (from .25% to over three percent) based on the total borrowed sum.
Thus, consider that this will factor into your final selling price when determining projected costs—track necessary deductions/credits for paying taxes on selling property.
You may not realize it, but there is usually more than enough wiggle room regarding closing fees regarding what you can write off when filing taxes. Significantly if these numbers have increased due to increases in interest or after signing contracts!
Make sure any documentation remains up to date throughout negotiations. This includes information on financiers or other parties involved and their respective roles.
All in all, taxes on selling property may not be the most pleasant thing to think about, but they don’t have to get you down either!
Just make sure to do your research, keep up-to-date with records and calculations (and consult a tax professional if necessary). Take advantage of credits/deductions where applicable.
There’s usually plenty of room for negotiating fees. Shop around when determining how much money needs to go toward this expense.
Common Mistakes Made When Selling Your Property
One of the most common mistakes people tend to make when it comes to taxes on selling property is simply ignoring them entirely!
Even if you’re not required/expected to pay a specific amount, a lot can change based on fluctuations in interest rates. This is true for other economic factors that may affect your overall costs.
For instance, let’s say you have an expected tax bill of $5000 but wind up owing only $2000 instead of new guidelines from Congress/local governing bodies. This means there are still 2000 dollars left over for savings or even reinvestment back into the home before moving out!
Some jurisdictions allow real estate agents themselves who help facilitate transactions between entities. This includes those offering flat-rate services and those who charge based on a percentage of the final sale price.
It’s also important to keep track and stay up-to-date with any changes in terms or conditions made during negotiations. They might affect your tax bill (such as VA funding fee percentages, closing costs. This is certain, especially if more than one person is involved, including realtors/agents and financiers.
If you follow these tips, however, you’ll be able to sell your home without worrying about underpayment penalties. Remember that it can sometimes take years before errors are discovered, so don’t wait around thinking they won’t happen to you either!
Property Sale Done Right
In conclusion, tax on selling property should be taken seriously, and there’s a lot of room for negotiation depending on how much you owe as well as other factors.
It can sometimes take years before any mistakes are discovered, so make sure to do your research and keep up-to-date with all the latest information from real estate agents/sellers who help facilitate transactions between buyers and sellers, including those offering flat-rate services as well as those who charge based on a percentage of the final sale price if possible.
You may even find that some jurisdictions allow realtors/agents themselves to offer discounts that lower overall costs – remember that it never hurts to ask!
If you follow these tips, however, then you’ll have no problem selling your home. Get in touch now to check out what I can do for you.