If you’re selling your Indiana home, you may be wondering, “What are the tax implications of selling a home in Indiana?” Keep reading for a rundown on what implications you might face after the sale of your Indiana home.
We’ve all been there. You’re selling your home and you just want the process to be done. But then you’re reminded that you may just have more to deal with when tax season comes around. Meaning, if you made a profit on the sale of your home, you may be responsible for or be required to pay capital gains taxes. We aren’t tax professionals, but we can give you information on some of the pertinent tax rules so you can hopefully minimize your tax bill. Keep reading to learn the tax implications of selling your home in Southern Indiana.
How Likely Is it to Pay Taxes on the Sale of a Home
We often hear the question, “How likely is it to pay taxes on the sale of my home?” The truth is, if your home has appreciated (or increased in value) significantly, you’ll reap the benefits of that appreciation via a large payday. And, you will more than likely own the IRS for the profits that you earned on the sale.
See this quote from a tax expert. “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.”
How Capital Gains Taxes Work
Now you know what capital gains taxes are, but let’s explore how they work and apply when selling your home.
Credit Karma says, “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.”
Not only this, but the IRS has two categories for capital asset gains: short-term gains and long-term gains. Basically, if you’ve lived in your home for less than a year, you’re dealing with short-term gains. And long-term gains apply when you’ve lived in your home for longer than a year. When you sell your home, then, “the capital gains tax depends primarily on how long you’ve owned the home and your income.”
“If you have a short-term gain, you’ll be taxed at whatever your normal tax bracket is. A long-term capital gain 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. . . . 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.”
How to Avoid Capital Gains Tax in Indiana
Here’s the good news. Yes, you may be on the hook for capital gains taxes, but there are some exclusions that some home owners qualify for when selling.
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.”
At the time of the creation of this article, you’ll have to meet this criteria as reported by the IRS . . .
- “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.”
For the most recent and up-to-date information on how to avoid capital gains taxes in Indiana, call us at 812.768.3108. Our team of real estate experts will direct you to the sources and information you need.
Special Circumstances for Capital Gains Taxes and Selling a Home
You saw the criteria above and you don’t meet it. Now what? There may still be an exception or way to help you. These 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
How to Calculate Capital Gains Tax
So you’re selling your house and you want to figure out what your probable capital gains tax will be. Is that even possible? For the most part, yes. You will need to accurately determine the cost basis for the home.
What is the cost basis for your home? To determine the cost basis find totals for the purchase price, or what you spent to buy the home, as well as every cost you had and spent on improving the home throughout your years of ownership. For example—Let’s say the purchase price of your home was $255,000 and you spent $45,000 on improving the home. You’d add the purchase price and the improvements together making your cost basis, $300,000.
Then you’ll remove certain fees you paid like costs for closing, real estate agent commissions, etc. You’ll then subtract your total cost basis from what you earned when you sold your home. After you’ve determined that number it should be the amount of earnings that are subject to capital gains tax.
Get Professional Assistance
While this is a brief overview of how to determine the cost basis for your home, there may be additional factors to help you determine the true cost basis. Please consult a real estate professional or tax professional to get advice personal to your situation.
Every situation and each home sale is unique, so we strongly recommend getting information that is tailored to you. The professionals at We Flip Houses would be honored to walk you through the basics and help you find the best outcome when you sell your Indiana home. If you have any questions or concerns about the tax implications of selling your home in Indiana, call us at 812.768.3108 or send us a message here.