Over the past year, we have seen an increase of 10.4% on home prices nationally, according to Trulia’s Price Monitor. We are seeing the beginnings of a robust recovery from the housing market crash of 2008- 2012. Thus, if you have owned your home for more than seven years, it is possible that you may be seeing a small-to-significant increase in the value of your home from your original purchase price.
That is great news if you are planning to sell your home!
Now that tax time is upon us, it is the perfect time to get familiar with the current tax rules, if you think you will be coming out ahead with some capital gains profit on your property.
Things to keep in mind:
When real estate changes hands, often there are tax considerations. The federal government and state governments set various laws requiring sellers and buyers to pay taxes on the real estate transactions. Laws vary from state to state, and most laws provide exclusions that allow sellers and buyers to avoid paying income tax on transactions when certain conditions apply. Knowing your tax obligations requires a close look at the types of tax laws that exist.
Federal Income Tax Reporting Laws
The Internal Revenue Service allows individuals to exclude from income all or part of a gain from the sale of a primary residence. To qualify, the property must be where the taxpayer lived for the past two years. Sellers are allowed to exclude up to $250,000 of a gain. The amount is increased to $500,000 for married couples who file joint returns. The IRS does not require the gain to be reported if the entire gain is excluded. If all or a portion of the gain does not qualify for exclusion, it must be reported as taxable income. The IRS requires the income to be reported on Schedule D. Federal tax laws do not permit a seller to deduct losses on the sale of his primary home. Federal tax laws allow individuals to claim the exclusion on two separate homes.
State Withholding Law
In most states, real estate sales must be reported via state income tax filings when certain conditions apply. As a general rule, the primary condition is that sellers have received a gain on the sale of real estate. A gain is determined based on the selling price as it relates to the price for which the seller obtained the home. Generally, this is through purchase. In some cases, though, sellers must pay the full amount of the selling price because the home was obtained at no cost. This is the case when homes are transferred through wills and quitclaim deeds. Exceptions include Florida, where there is no state income tax. In California, state law requires withholding of 9.55 percent of the total sale price for individuals. An exclusion is provided for properties that sell for less than $100,000. For corporations, the withholding amount is 8.84 percent. Banks and financial corporations are required to pay 10.84 percent, and S corporations are required to pay 13.05 percent. To ensure payment of the tax, the buyer of the home actually pays the amount due. The seller then files a form with his income taxes stating the amount of his gain or loss on the sale of the home.
If you have any questions, please feel free to contact JV LAW GROUP. Call us today at (714) 752-3270. We are here to help!
