Tax Implications of Selling Your Home in Dayton

If you’re in the process of selling your home, you’re probably eager to move forward with your life in your new residence. However, it’s essential to consider potential tax obligations. If you’ve made a profit from the sale of your home, you could be subject to capital gains taxes. To optimize your financial situation, it’s crucial to have a grasp of the relevant tax regulations. Let’s explore the tax implications associated with selling your home in Dayton.

The Likelihood of Paying Taxes on the Sale of Your Home 

When you sell your home in Dayton, especially if it has experienced substantial appreciation, you can expect a significant payout. However, it’s crucial to understand that this may also come with tax obligations to the IRS. As your home is considered an asset, it is subject to capital gains taxes.

At tax time, one of the most important questions for someone who has recently sold a home is whether they will have to pay federal capital gains taxes on their profit. In simple terms, capital gains are the profits made from selling capital assets such as homes, cars, investments, and other high-value items.

Considering the significant increase in home prices between 2020 and 2022, it is highly likely that your property has gained substantial value. Consequently, it is important to be prepared for potential tax liabilities when selling your home.

How Capital Gains Taxes Work

Now, let’s look at how capital gains taxes work and how they apply when selling your home. 

“A capital gains tax is a tax placed on any profits earned when a capital asset is sold. The IRS considers almost everything you own and use for personal or investment purposes to be a capital asset. These taxes are due on the tax deadline after the asset is sold, and it applies to investments like stocks, bonds, and real estate.”

When it comes to selling your home, understanding capital asset gains is essential. The IRS distinguishes between two categories: short-term gains and long-term gains. If you have lived in your home for less than a year, any gain from the sale will be considered a short-term gain. On the other hand, if you have owned the property for a year or longer, the gain will be classified as a long-term gain.

The amount of capital gains tax you owe depends primarily on the duration of your ownership and your income. For short-term gains, you will be taxed at your regular tax bracket rate. Long-term capital gains, however, receive preferential tax treatment and are subject to a tax rate of either 0%, 15%, 20%, or 28%. The specific rate applicable to you will vary based on your income and tax filing status.

It’s important to note that certain conditions allow you to exclude a portion of the gain from the sale of your home from being taxed. If you meet these conditions, you can potentially exclude the first $250,000 to $500,000 from the sale, effectively avoiding taxes on that amount altogether.

How to Avoid Capital Gains Tax

When selling your home, you may indeed be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller.

According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”

For such an exclusion, you’ll have to meet these qualifying criteria . . . 

• “You’ve owned the home for at least two years during the past five years prior to the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
• The home was your principal residence for a minimum of two of the five years prior to the sale. For those married and filing jointly, both spouses must meet this requirement.
• “You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.”

If you think you may qualify, be sure to consult a Dayton agent. To discover more, call +1 (937) 598-2274.

Special Circumstances

Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in Dayton. The special qualifying circumstances here include . . . 

• Gaining ownership of the home during a separation/divorce
• If your spouse died during your ownership of the home
• Owning a “remainder interest” in the home when selling
• Having your previous home condemned
• Being a service member during your ownership of the home
• Releasing the home in a “like-kind” exchange

Calculating Capital Gains Tax

If, on selling your home, you want to calculate your probable capital gains tax, you will need to determine the cost basis for the home.

The cost basis includes what you spent to buy the home, as well as any money spent on improvements over the years. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”

“From there, you can add up the purchase price of the home, minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale.” This will yield the amount subject to capital gains tax.

Get Professional Assistance

If this capital gains tax business seems complex and complicated, that’s because it certainly is. So when selling your home, be sure to consult a tax professional and an experienced Dayton investor. We can guide you through the basics to help you arrive at the best outcome when you sell your home. So if you have concerns about the tax implications of selling your home in Dayton, be sure to contact us at +1 (937) 598-2274.