Do you know everything you need to know about taxes when selling your house? When it comes time to sell your house, there’s always a lot of talk about listing price, closing costs, and mortgage rates, but it’s important to take into account all of the tax implications that come with a home sale. Taxes can present an often confusing aspect of the home-selling process, especially if you’re not an accountant or tax expert beforehand. It’s entirely possible that you haven’t even accounted for the taxes you might have to pay when you sell your home.
So let’s take a closer look at what you should know about taxes before you sell your house in Tennessee. Of course, you can avoid paying taxes altogether on your home by selling it as-is to a cash buyer like Nexus Homebuyers. But if you want to take your chances on the open market, you’ll want to be prepared for the potential tax pitfalls ahead.
Capital Gains Tax
If you know about no other taxes in the home-selling process, you’ll want to be aware of what the capital gains tax is and how it works. Capital gains are the appreciation that eventually becomes your profit when you sell your house. Think of the difference between the price you paid for the house and the price you sold it for. That’s capital gains. The capital gains tax rate that you’ll pay will depend on your income as rates range from zero to 15 and up to 20 percent, depending on the income level.
Ways To Avoid Capital Gains Tax
For many people selling their house, federal tax law very often allows for the first $250,000 (or $500,000 from joint filers) in capital gains to go tax-free. Any profits incurred over that amount would still be taxed. However, there’s are some catches with that tax exclusion. You’ll need to have lived in your home for at least two of the past five years and not claimed the same exclusion on a different residence within two years. There are also other circumstances that may affect eligibility, but those are specific to servicemembers and those dealing with divorce or death. You’ll want to read up on the specifics of capital gains in order to understand exactly where you stand and what you’re able to avoid in taxes.
When Are Taxes Due?
Along with understanding the taxes that you need to pay, knowing when those taxes need to be paid is a critical part of the process as well. Long story short, any capital gains taxes that you’ll owe because of the sale of your house will need to be paid at the tax deadline for the same year. So if you sold your house on February 10, 2020, you’ll have to pay those taxes when you do your 2020 tax returns, which are due April 15, 2021.
There are some circumstances that may require you to pay estimated tax payments beforehand. And some people will just go ahead and start making estimated tax payments beforehand so they don’t get hit with a huge tax bill in April.
Another option is to increase your withholdings in the year instead of sending the IRS a big payment all at once. So if you think you’ll owe $15,000 in capital gains tax on the home sale, you could choose to increase your paycheck tax withholdings each month in order to account for that extra cost. Whatever you do, make sure you talk to a tax professional first.
Real Estate Transfer Taxes
Most states impose a document transfer fee, which is also known as a real estate transfer fee or stamp tax. This fee is imposed on the sale of a property and is meant to recover the cost of recording deed changes as well as other documents filed with state and local governments.
Each state charges a different rate in the assessed value of the house. So let’s say you live in a state with a rate of $5.25 per $500.00 and the sale price of your house is $200,000. That means you’re paying $2,100 in real estate transfer taxes. Very often, the market buyer and the seller will split this fee, but it can also be part of negotiations.
Make sure you check with your county or municipality as there can also sometimes be local fees applied to the transfer of property. Don’t be too surprised to find out your city has its own set of fees too. If you’re working with a real estate agent, ask them if that’s the case upfront so you can plan for the cost. Make that real estate agent work for their commission fee, at least.
Many states don’t make it easy when it comes to figuring out what your property taxes will be in a given year. Some states don’t even collect property taxes. However, the counties, cities, school districts, and other local authorities may instead charge property taxes, and each one can vary depending on where you live and what the local laws are.
Some parts of the country are better than others when it comes to property taxes. According to Wallethub, Hawaii, Alabama, Colorado, and Louisiana have the lowest property taxes. Tennessee comes in at No. 15 overall with an effective real estate tax rate of 0.73%. They also estimate that the average annual tax amount on a $205,000 home would be $1,490 while the annual tax amount of Tennessee’s median home value would be $1,153.
Where do these tax amounts and property values come from? Each year, a county assessor calculates the market value of your house and then charges you based on that number. You’ll usually be expected to make that payment over two periods in May and September.
A good real estate agent will know ahead of time what you can expect in terms of property taxes. You’ll also want to check with the local county assessor as they’ll have data on your specific property. You should also keep an eye on any recent changes in the Tennessee government as state tax reform is always something on the docket for legislatures.
Avoid Taxes Altogether
Given all of the potential problems that come with paying taxes when you’re trying to sell your house in Tenessee, it’s understandable that you might not want to even try. However, if you want to sell your house fast and avoid paying many of the taxes that will cut into your profits, consider selling your Tennessee house as-is to Nexus Homebuyers.
We’ll buy your house in any condition or situation, even if you’re already dealing with tax or lien issues. We’ll review the details of your house and find time to meet you at the property quickly. We’ll handle all the repairs and deal with all the problems so you don’t even need to worry about it. We’ll also make you a fair cash offer based on the value of the house. Even better, there are no fees you’ll need to deal with beyond that offer. No mortgages. No real estate agent commissions. And you can cut out most of all of the taxes involved. And once you accept the offer, we close on your schedule and pay you cash for your house!
Contact us today to get started and get your no-obligation offer ASAP!