Guide to Avoid Taxes on House Sale
Costs of Selling a House Posted on January 8, 2020 Posted by Will
Tom is one of our good friends who we’ve known for quite a long time. When thinking about selling his house, Tom was dreaming about how great it was going to feel when finally signing that deal. Tom stood to make a lot of doe and the idea of being able to move on with life the way he had so often envisioned was finally within his grasp.
In Tom’s eyes, selling his house would mean getting out of credit card debt, paying off those student loans, taking his family to some envied tropical destination. There was just one problem – Tom didn’t see that Uncle Sam wanted his piece of the action too! How was Tom going to secure and ensure that everything he’d been dreaming about would become reality?
In this article, we’ll show you how to make a fortune by not having to pay taxes when selling your home.
Capital Gains Tax on Real Estate
The IRS has some really long and confusing definition of capital gains, we’ll spare you the pain by explaining it in plain English. Capital gains is the difference between what you pay for a house – which is called your basis – and what you sell it for.
The state of Texas does not assess capital gains tax on real estate.
But beware! You’re still going to owe capital gains tax to the IRS. Unless you read on.
In Tom’s case, this meant when buying his house for $220,000 in 1999 and then when selling it in 2019 for $450,000, the difference between his purchase and sale price of $230,000 represented what he might pay in capital gains tax. Here’s the simple formula:
Capital Gain = Selling Price − Purchase Price
Now back to Tom and cheating Uncle Sam out his doe…
Cost of Capital Gains Taxes When Selling a House
When doing the math on how much in taxes it costs to sell a house, Tom was wrought with grief. What he realized is that as a single man earning $53,000 a year, he would have to pay 15% on his gain. That equated to $34,500! That’s 65% of what he earns in a year!
Just the mere thought of having to shell out thousands was mind numbing. Even worse Tom thought, “I’ve been a good citizen, I’ve always done right, I’ve paid my taxes my whole life, I’ve never taken more than my fair share…In fact, I’ve paid more than my fair share!” We’ve all been there and understand what Tom was thinking and feeling.
At this exact moment Tom decided he’d had enough, he was going to do everything possible to get his family to that island vacation, that there’d be no more student debt, there’d be no more late night calls from credit card companies.
What did Tom do? He got smart, he began educating himself as you are now, and he wanted answers for how to avoid paying taxes on his house sale.
How much you pay in capital gains tax varies based off your taxable income.
Your taxable income is most often the gross amount of money you earn at your job. It can also include items like furniture and appliances. Be sure to save purchase receipts and instead of throwing items away, sell them, even if only for a dollar, to help offset your taxable income. Just be sure to write-up and date sales receipts.
What is My Capital Gains Tax Rate?
As cash buyers of houses in central Texas, we’ve come across lots of folks experiencing the same thing as Tom. To be honest, we’ve even gone through it ourselves. So what did we do? Just as you are, we started learning about capital gains tax exemptions in Texas and not only did we learn, we implemented what we now knew to help us save thousands of dollars!
It was at this moment, in our absolute moment of bliss, that we realized how much we could help anyone looking to sell a house fast in central Texas. When Tom contacted us, we were ready to help.
MAGIC. That’s what we told Tom about. And that magic wasn’t because of some circumstance unique to only us. It was magic for all, magic for someone like you, it was the MAGIC of avoiding taxes on a house sale in central Texas!
Capital Gains Tax Exemption in Texas
IRS Section 121 has an exclusion that authorizes an exemption from having to pay any capital gains tax when you sell your primary home. Even better, the exemption goes all the way up to $250,000 for single persons and up to $500,000 if you’re married and filing jointly.
It sounds too easy to be true, but it is true, provided you meet two very easy criteria.
How Do I Become Exempt from Paying Capital Gains Tax on my House Sale?
To qualify for the house sale tax exemption, you must meet both the ownership test and the use test. You’re eligible for the tax exclusion if you have owned and lived in the house as your main home for a period adding up to at least two years out of the five years prior to selling it. You can even meet the ownership and use tests during different time periods.
Qualifying for Capital Gains Tax Exemption on House Sale
The simplest way to achieve this is to live in your house for two consecutive years and then to sell it. Alternatively, you could live in the house for one year, rent it out for 2 years, move back in during year 4, and then sell it before the end of year 5. You’re still exempt! You could even reset the clock when you move back in during year 4, instead of selling in year 5, live in it for 2 consecutive years and the 5 year period starts all over.
That’s it, voila! Taxes on a house sale avoided. But what about Tom?
How Much You Save on Capital Gains When Selling Your House
You guessed it – Tom used the money he would have otherwise spent on taxes to pay off student debt and to pay down those credit cards, which stopped those constant calls from pushy credit card collection companies.
In the process, his credit score improved – he was able to refinance his car, reducing his monthly payment by $91. He bought a nicer new house and now has money left over every month for doing the fun things in life.
Tom had succeeded, he was about to fly for the first time! He sat back to take it all in as he lifted off the parasailing platform with his kids over the Caribbean Sea.
Here’s how he did it:
Sell your house in central Texas at the start of the new year to enjoy tax savings all year long.
Central Texas house buyers can close in as little as 7-days and you can often have us pay more than market value. Enjoy a full year to decide just what you’ll do with cash for your house. See what we can pay for your place, contact us today to get your customized offers!