Avoiding Capital Gains Tax on Real Estate

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Avoiding Capital Gains Tax on Real Estate

If you’re going to sell a house in Tennessee, you need to be aware of what capital gains tax is and how it works. There are a lot of factors to consider when selling your Tennessee house but knowing how capital gains taxes impact your profits and how much money you can make for selling your house, it’s critical to know all the house selling taxes and how you can potentially avoid capital gains tax in Tennessee. You have plenty of costs and concerns to worry about when selling a home, so a good understanding of taxes on your property is important. 

The more you know about capital gains taxes, the better off you’ll be when it comes to selling your Tennessee home. This is true whether you sell your house on the housing market using a real estate agent or if you prefer selling your house as is to a cash buyer like Nexus Homebuyers. Let’s take a closer look at capital gains tax, how it works, and how you might be able to avoid paying them in Tennessee. 

What is Capital Gains Tax?

When it comes to understanding capital gains tax, the most important thing to know before selling your house is what, exactly, that is. You don’t want to ask yourself, “What is capital gains tax?” after you’ve already sold your Tennessee house and now you’re committed. Capital gains tax can take a huge chunk out of your home sale profits so you don’t want that to be a surprise. Plus, if you wait too long, you can miss out on all the important exemptions that could have omitted capital gains from your tax bill. 

So let’s start by defining capital gains. Capital gains are the money that you make in profit on a home sale or property sale. For example, let’s assume that you paid $250,000 for your house five years ago. You’ve decided to sell your Tennessee house and you are able to get $350,000 for it today. That $100,000 difference is your capital gains, the extra money in value that you were able to get by selling your house. Ultimately, it can be defined in this situation as the difference between what you paid for it and what you sold it for. It’s also possible to apply capital gains to other types of property, such as stock or land. However, for the purposes of this conversation, we’re going to stick with home sales as we discuss them.

So what is capital gains tax? Capital gains tax is the tax that you pay to the government on your capital gains. Now, there are two types of capital gains taxes that you should be aware of, and the length of time that you’ve owned your Tennessee home will determine which kind you end up having to pay. 

If you have owned your Tenessee home or property for a year or less, then you’re going to be looking at short-term capital gains taxes. This tax rate is equal to the regular income tax rate that you are currently paying based on your income. 

But if you have owned your Tennessee home or property for more than one year, you will have to pay long-term capital gains tax. This rate will be dependent on your taxable income as well as your tax filing status. Depending on where you fall, you will likely end up with one of three capital gains tax rates: 0%, 15%, or 20%. 

How Does Capital Gains Tax Work in Tennessee?

The good news when selling a house in Tennessee is that Tennessee is one of only nine states that does not tax capital gains. You may still have to pay capital gains taxes to the federal government, but you will not be required to pay it to the state. For what it’s worth, all of the states that surround Tennessee do require a state capital gains tax. This helps to make Tenessee feel like a very tax-friendly play to buy and sell real estate. 

Capital Gains Tax Exclusions

One of the biggest things to be aware of when selling your Tennessee house is that there are exclusions and exemptions when it comes to capital gains tax. Depending on certain factors, you may be able to avoid paying capital gains tax on your property sale. 

The IRS allows sellers to avoid capital gains tax through what they call the home sale exclusion. If you qualify, a single-filing taxpayer can exclude $250,000 in capital gains and a joint-filing married couple can exclude $500,000 in capital gains on the sale. However, there are requirements. First, you must have owned and used the home as your principal residence for at least two years. Next, you must have owned the property for more than years in the five-year period before selling it. You also cannot have claimed this exemption on another home or property within two years before this sale. And there are a few other caveats in special circumstances that you should be aware of. Consult IRS Publication 523 for more details. 

The good news is that even if you’ve used the exemption before, so long as it was longer than two years ago, you can claim it once more on this current Tennessee home sale. 

So for example, if you are married and purchased your Tennessee home 10 years ago for $200,000 and sold it today for $500,000, you would be making $300,000 in capital gains. Since you can claim up to $500,000 in capital gains exemptions (assuming you meet all the criteria), you do not need to pay capital gains on this sale.

What Qualifies You to Pay Capital Gains Tax on Property

If you purchased a Tennessee home and sold it later, and you do not meet the requirements of any exemption, you will be required to pay capital gains tax on whatever profits you make. Specifically, if you decide to sell your house a year after purchasing it, that will trigger a capital gains tax requirement. And even if you do meet the exemption requirements, you will have to pay capital gains tax on any capital gains beyond the exempt amount. So if you have a $500,000 exemption but you made $600,000 in capital gains, you will still need to pay tax on that remaining $100,000. 

How to Avoid Capital Gains Tax in TN

While the idea of paying capital gains tax might sound scary, there is good news. It is very possible to avoid capital gains tax in TN if you meet certain criteria or if you sell your Tennesee house in a certain way. One such way would be to work with a cash buyer like Nexus Homebuyers, who can help you sell your house fast, get cash for it, and avoid unnecessary fees. If you’re looking for companies that buy houses in Alcoa or elsewhere, we can help. And if you are wondering how to sell my house fast in Clinton, we know how. Here are some other ways as well.

Living in the House for 2+ Years

If you’re considering selling your Tennessee house but don’t want to pay capital gains tax, make sure you wait until you’ve lived in the home for at least two years before selling. The great thing is that you don’t even need to live there consecutively, you just need to make sure you consider this house your primary residence for two years within a five-year timeframe. So that makes it easier if you also rent out the property or have multiple homes. But if you do decide to sell your Tennessee house before you’ve lived in it for two years in that time, you may have to pay capital gains tax. 

Check if You’re Exempt

Along with the capital gains tax exemptions we’ve outlined above, you should check to make sure you qualify for any other exemptions that are available to you. Depending on your status as a military member, veteran, or retiree, there might be special exemptions that you can take advantage of. There are also considerations for health reasons, work-related issues, and what the IRS refers to as “unforeseeable events.” Take a close look at IRS Publication 523 to confirm any further exemptions. 

Avoiding Capital Gains Tax on Real Estate Keeping Home Improvement Receipts

Keeping Home Improvement Receipts

An important part of the exemption process is to make sure you keep all your home improvement receipts. The IRS is going to take into account all renovations and improvements you’ve made since you purchased the property when they determine the cost basis for your Tennessee house. That can make a major impact on the value, especially if you’ve done a lot of repairs or renovations. 

Let’s say you bought your Tennessee house for $200,000 but you also paid $50,000 to remodel a bedroom and build a deck. Then, you sell the house for $300,000. Now, you’ll only be responsible for $50,000 in capital gains instead of $100,000. And depending on what kind of exemptions you qualify for, that could make a big difference. 

1031 Exchange

A 1031 exchange is the name given to when two investment property owners swap real estate. Doing so allowed for capital gains taxes to be deferred to a later date. This can be a bit complicated if you don’t know the intricacies of the IRS code so make sure you are aware of the rules and requirements. 

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If you want to avoid capital gains tax on real estate, you have a lot of potential options available to you. Let Nexus Homebuy

ers help you figure out the best solution for you. If you want to avoid paying real estate commission fees, get cash for your house, and sell without making repairs, we can help you do it! Accepting a cash offer for your house is easy. We buy houses in Tennessee and would love to work with you today. 

Get an all cash offer on your home