What Are the Tax Implications When Selling Your Home?
There are many complicated tax rules involved when selling a house.
The buying and selling of a home is usually the largest financial transaction that you may make in your lifetime. As with most financial transactions, there is a tax angle when it comes to real estate. You should know what your tax implications are for your home in Connecticut as you go into the deal so that you are able to plan and avoid issues with either the IRS or State Tax Departments.
Real estate taxes in CT are a complex topic to navigate. The amount of tax that you have to pay will depend on a variety of factors, including:
Selling your house on the traditional market
Selling it with an investor
What state you are selling your real estate in
How much profit you will gain from selling your property
And much more.
Real Estate Taxes When Selling Your Home in Connecticut
One of the most commonly asked questions from homeowners looking to sell their property is “will I have to pay taxes when selling my home in Connecticut?” Fortunately, for some of the criteria, Connecticut's real estate tax rules are the same as those at the federal level. Unlike with most other transactions that have a capital gain, the government gives you a huge break when you sell your principal home for a profit.
You as the Seller, can exclude up to $250,000 ($500,000 if married filing jointly) of the profit from the sale. This exclusion is available for an unlimited number of times, and it applies to houses, apartments, and condominiums. However, as always there are other rules and limitations that you need to be aware of with real estate taxes in CT.
To take advantage of the exclusion of real estate taxes in Connecticut, you must own and occupy the home as your principal residence for at least two years before you sell it. Owning it and occupying it are two different things, however, and although you must meet both requirements, you don’t have to do this simultaneously.
As one legal site explains, “As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times.” This is an eligibility break for renters-turned-buyers, who can count rental time before the purchase as part of the “occupy” time. Also note the word “principal.”
To correctly consider the taxes when selling your home, the rules dictate that this must be your main home, where you spend most of your time. You can only have one principal residence at a time. If you have a condo in the city where you work but spend the summer in your beach house, your condo is still your principal residence. The IRS also imposes conditions to be eligible for the larger $500,000 married exclusion. You must meet all the conditions below:
You are married and file a joint return for the year.
Either spouse meets the ownership test.
Both spouses meet the use test.
During the two-year period ending on the date of the sale, neither spouse excluded gain from the sale of another home.
If a spouse is deceased, under what conditions can the surviving spouse use the $500,000 exclusion? You must meet all of the following conditions:
You sell your home within two years of the death of your spouse.
You have not remarried at the time of the sale.
Neither you nor your late spouse took the exclusion on another home sold less than two years before the date of the current home sale.
You meet the two-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).
Getting a Tax Break on Improvements
You can get a tax break on home improvements. As an example – If you are single and buy a house for $300,000, you’re limited to a sale later of $550,000 before you start having to pay taxes on your real estate sale. However, any improvements you made will increase that $300,000 “basis”. The IRS will consider an improvement as a new room, landscaping, a heating system, central ac, new roof, and new siding. General repairs, like a faucet or fixing electrical outlets do not add to the basis. Upgrading the electrical system as part of a larger renovation project would count towards the basis.
Real Estate Taxes in Connecticut When Transferring a Home
If you are thinking of transferring your property, you will still be liable for real estate taxes in CT. These will vary depending on the value of the property at the time of transfer, and can be expected to include a base rate and municipal taxes. In Connecticut, properties worth $800,000 or less, will pay 0.75% base rate. Properties that are more than $800,000 and less than $2.5 million, can expect to pay 1.25%. Even within the state of Connecticut, the base rate can vary, as the Government has targeted investment communities where real estate taxes differ.
Real Estate Taxes in Connecticut When Selling Your House Below Market Value
There are some cases where a seller may choose to sell their house below market value, for example, if they are going through a divorce or have inherited a property and need a quick sale. There are also cases where a property needs to be sold quickly due to personal circumstances or significant damage has been done to the property. When selling your house in Connecticut under market value, the tax implications may be different.
If you are looking for a quick sale, as the seller, you will still be liable for all the closing costs associated with a sale, such as attorney costs, estate agent costs, etc. If you choose to sell your house with a cash buyer, then you do not need as many third parties involved in the process and can save money, so the transaction is more worth your while, and you will see more cash in hand. When selling your home in Connecticut under market value to a family member, you will need to consider how low you are going to go.
If there is too big a gap between its market value and reduced sale price, then there may be gift taxes involved in addition to capital gains tax and inheritance tax. If the gap is not too big, it may be in the IRS exclusion zone. There are also other alternatives, such as a quitclaim deed.If you are selling your house to a cash buyer, you will only have the standard tax to pay, depending on the price of the offer and the profit that you gain.
Calculating Real Estate Taxes for Your Connecticut Property
Taxes when selling a house can be calculated in advance. Whether you are selling your home for cash, or selling it on the traditional market, it is vital that you consider the real estate taxes that are applicable in Connecticut, as it will impact your budget and your next steps considerably. You should calculate the real estate taxes that you may be liable for in advance, so there are no unpleasant surprises. It is important to do your research and speak to a professional if you are lost when it comes to real estate taxes. Calculating them in advance can help you ensure the process of selling your home goes smoothly, however, it is not a simple task.
You will need to understand:
How much your property is worth
How much you are selling it for
How much profit you will gain from the sale
The tax rules and rates in the specific location of your property
And more.
When considering the taxes on selling your home, you should work with a good professional Certified Public Accountant or Attorney to make sure your plans comply with the tax code. It will save you from any future tax surprises from your real estate. If you are thinking of selling your property for cash, you can request an offer that will provide you with the information you need to calculate the taxes that you may be liable for.
We here at CT Cash Homes are different from any other buyers and can help you when it comes to the taxes when selling your home with an all cash offer. Contact us today to learn more about how we can help you.