Selling your home can be stressful but also exciting. While it can be a long process, requiring a great deal of paperwork, preparation, and patience, achieving your desired sale price can be a thrill. Working with a trusted house buyer that covers all closing costs can leave you with the most cash in your pocket, but there still comes the dreaded tax on the actual sale. Surprisingly, many home sellers are taken by surprise when they learn they are required to pay tax from the sale of their house.
But in fact, you are required to pay tax after selling a house in California. The good news is though, that you are only taxed on any profit that you make from the sale. If you do not make any profit, you will not pay any tax. But the higher your profit, the higher your tax bill. The tax from the profit on selling your house is called capital gains tax and this article will help you get a stronger understanding of it.
How Much Are You Taxed When You Sell Your House?
The amount you are taxed when you sell your house depends almost entirely on how much profit you make from the sale. If you have spent very little money on the property over the years and double your money at sale time, you will pay a much higher capital gains tax than someone who makes a lower profit. This may sound harsh.
But the capital gains tax was not designed to hurt homeowners. Instead, it was designed to protect the market and taxpayers from wealthy investors looking to make immense profits from purchasing and flipping homes and land for profit.
Do Seniors Have To Pay Capital Gains Tax?
In California, people over the age of 62 are considered seniors, and there are many tax exemptions and other benefits to assist them. Capital gains tax, however, does not fall into this category. Regardless of your age, you will be required to pay capital gains tax on the profits of a sale from your home. Again, this may sound harsh, but if everyone over the age of 62 were exempt from capital gains taxes, then senior investors would be free to make untaxed profits from the sale of real estate.
How Do I Avoid Paying Taxes When Selling My House?
The only way to avoid paying capital gains tax is to sell your house at a loss. This means making no profit from the sale. Some sellers may benefit from doing this, but these cases would be rare. Generally, even after paying capital gains tax, you will still end up with more money in your pocket from making a tidy profit on the sale of your home.
However, you may be able to reduce the amount of capital gains tax you need to pay. If you owned and lived in your house for two of the five years prior to selling it, then up to $250,000 of the profit is tax free. This means if you make a $300,000 profit on the sale, you may only be taxed for $50,000 of it. This tax free threshold doubles for married couples to up to $500,000.
It is important to note here that even if the sale of your home is not subject to capital gains tax because you have not made a profit, you are still legally required to report the sale to the Internal Revenue Service (IRS).
Summary
Tax can really take the fun out of making a healthy profit from selling your home. But things like paying property tax on your home are a part of life, and capital gains tax is one that ultimately protects all taxpayers. Hopefully, this article has helped you better understand how this tax works and when you are required to pay it.
Ensure that you claim your tax-free threshold if you owned and lived on the property for two of the five years prior to the sale. This can save you a lot of money.
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