Real Estate and Your Taxes: A Guide for Buyers and Sellers

Ensuring your taxes are done correctly can be challenging all on its own.  Including the purchase or sale of a home adds another layer of complexity to the task. To give you a better view of the bigger picture, let’s cover how real estate transactions affect both buyers’ and sellers’ taxes:

The Details Matter

As with all things tied to your taxes, there are a few specific points that can have a large impact on how much tax you will owe and what types of deductions can be allowed. 

First and foremost, your marital status has an undeniably massive influence on everything tax-related. Next, how you and your (possibly) spouse choose to file your taxes will change the overall outcome. 

If you are married, it is likely that filing jointly would be in your best interest. However, if you are dealing with a complicated financial portfolio, consulting an experienced accountant could reveal a more beneficial alternate filing route. 

Finally, there’s real estate to consider. Owning multiple residences and selling off one of them is much more financially involved than selling your one and only residence. Therefore, keep in mind that most tax deductions and benefits are accrued almost entirely based on selling a primary residence and not secondary pieces of real estate.

Dealing With Capital Gains

With respect to real estate, when you sell your home, chances are you’re coming out with some profit from the transaction, and that does get considered income in the form of capital gains. 

Capital gains are taxed, but there are stipulations on how much you must earn within a year to be required to pay taxes on them. Someone filing as single selling their primary residence is exempt from the first $250,000 from their home sale. For a married couple filing jointly, this capital gains tax exemption is doubled to $500,000. 

As you can see, this is one area where you and your spouse’s tax filing statuses truly matter, so consider all the details carefully before adjusting what seems like a solid plan.

Now, if you do own multiple properties you may be asking yourself how you determine which one is your primary residence. The easiest way this is figured out is by using what is called the 2-in-5-year rule. This rule states that the home in which you spend a minimum of 24 months living in as your primary residence within a five-year period is legally considered your primary residence for tax purposes. After all of this explanation, the final critical bit to remember is that this capital gains tax exemption can only be used once every two years, so it may not be beneficial if you’re frequently buying and selling real estate.

Property Taxes

It should come as no surprise that upon buying real estate you then become the individual responsible for that home’s property taxes. You can expect a tax bill to be mailed to you twice a year, with the total payment split in half to eliminate the need to pay your property taxes as one lump sum. 

Factoring in a property’s latest tax bill, along with your utilities, services, and mortgage payment, is key to budgeting effectively into the future years. If you have taken out a home loan from a mortgage lender who puts part of your mortgage payment into an escrow account, it’s likely that you will need to send your first tax bill to the lender. 

They will need this first tax bill for their records along with dispensing the payment from your escrow account. Any future tax bills are likely to be handled directly by them with little to no intervention on your part.

Understanding Real Estate and Your Taxes

If you’re looking to buy or sell real estate to take advantage of any tax breaks you may get, contact our team today at 831-588-2334!

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