If you’re selling your home, you likely just want to get it over with and get started on the new chapter in your life in your new home. But hold on – you may have to deal with the tax man. If you made a profit on the sale of your home, you may to pay capital gains taxes. Having some understanding of the pertinent tax rules can help you minimize your tax bill. So let’s take a look at the tax implications of selling your home in South Carolina.
The Likelihood of Paying Taxes on the Sale of Your Home
If your home has appreciated significantly, as is often the case in South Carolina, you may be looking at a large payday when selling your property. However, along with that financial windfall comes the reality that you will likely owe the IRS money for the profits you’ve earned on the sale. This is because your home, like other valuable property, is considered an asset and is subject to capital gains taxes. While you may enjoy the profits from the sale, it’s essential to be prepared for the tax implications that come with it.
“The biggest question at tax time for someone who recently sold a home is whether they’ll have to pay federal capital gains taxes on the profit. In short, capital gains are the amount of money you make from selling capital assets – property like homes, cars, investments, and other high-value items.” When you sell your home for a profit, the IRS will assess capital gains taxes on the amount of that profit, which is the difference between the selling price and the purchase price, minus any improvements or deductions you may qualify for. It’s important to note that the IRS treats these gains as income, which could increase your tax liability depending on your income bracket.
Consider, too, that home prices rose dramatically between 2020 and 2022, which means that if you purchased your home before these price hikes, your property likely saw significant appreciation. This rapid rise in home prices across South Carolina could mean that the capital gains on your home are substantial. As a result, you may be facing a higher tax burden than you might expect. Even if you qualify for some exemptions, such as the home sale exclusion, which allows single homeowners to exclude up to $250,000 of capital gains from taxes, or $500,000 for married couples, you may still owe taxes on the portion of the gain that exceeds these limits.
So, yes, it’s very likely that you will have to pay taxes when you sell your home, especially if it has appreciated significantly in recent years. It’s advisable to consult with a tax professional to understand how these capital gains taxes apply to your specific situation and whether there are any strategies you can use to minimize your tax burden. By planning ahead and factoring in these taxes, you can ensure that you aren’t caught off guard when it comes time to settle up with the IRS.
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 a home, the IRS looks at the difference between the purchase price and the selling price as your profit, which is what gets taxed.
In addition, the IRS has two categories for capital asset gains: short-term gains and long-term gains. When it comes to selling your home, if you’ve lived there for less than a year, you’ll have a short-term gain, meaning the profit from the sale will be taxed as ordinary income. On the other hand, if you’ve lived in your home for a year or longer, the gain is considered long-term. This distinction is crucial because “the capital gains tax depends primarily on how long you’ve owned the home and your income.” Short-term gains are taxed at your regular income tax rate, while long-term gains enjoy more favorable tax treatment.
If you have a short-term gain, you’ll be taxed at whatever your normal tax bracket is. This could result in a significant tax liability, depending on your income. A long-term capital gain, however, gets preferential tax treatment and is taxed at a rate of 0%, 15%, 20%, or 28%. These rates vary according to your income and tax filing status. For example, if you fall within a lower tax bracket, your long-term capital gains may be taxed at a lower rate, potentially saving you a considerable amount on your tax bill. However, if you’re in a higher bracket, your rate could be as high as 28%.
There are also exemptions that may help reduce or eliminate the tax on the sale of your home. “And if you meet certain conditions, you can exclude the first $250,000 to $500,000 from the sale of your home and avoid paying taxes on it altogether.” To qualify for this exemption, you must have owned and lived in the home for at least two of the five years leading up to the sale. If you meet this requirement, you can exclude a portion of the profit from the sale, significantly reducing or eliminating any capital gains tax liability.
Understanding how capital gains taxes work and the potential for exemptions is essential when selling your home, especially if you’ve experienced significant appreciation. Being aware of these factors can help you make informed decisions about timing your sale and understanding the tax implications that come with it. If you’re unsure about how these taxes might affect you, consulting with a tax professional can provide guidance and help you navigate the complexities of selling your home while minimizing your tax burden.
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 South Carolina agent. To discover more, call (843) 410-3050.
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 South Carolina. 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
IIf this capital gains tax business seems complex and complicated, that’s because it certainly is. The ins and outs of how these taxes are applied can be tricky to navigate, especially when you’re selling a home with significant appreciation. To ensure you fully understand your tax obligations and avoid costly mistakes, it’s essential to consult both a tax professional and an experienced South Carolina investor. A tax professional can provide insight into potential deductions or exemptions you might qualify for, while an investor can help you evaluate the real estate market and guide you through the sale process. Together, we can help you navigate the complexities of capital gains tax and work toward securing the best possible financial outcome when selling your home.
So if you have concerns about the tax implications of selling your home in South Carolina, be sure to contact us at (843) 410-3050.