Real Estate and Your Income Taxes

Looking around Charlotte it’s easy to see that the market is appreciating, aka the home values are increasing. With more people moving to Charlotte and interest rates still low, there are more buyers than properties available. If you purchased your home even a year ago it’s worth significantly more in today’s market. This has many people very excited to cash out the equity this market situation has given them. But selling your home without having lived there for two full years has some serious drawbacks that most homeowners and even some real estate professionals DON’T know about.

Those drawbacks are related to your taxes.

Under the current tax guidelines, as long as a homeowner has lived in their home as their primary residence for any 2 of the last 5 years, they can exclude $250,000 or $500,000 worth of gain on the sale of their home depending on if you file as single or married filing joint.

… So, what the heck does that all mean?

Let’s say that you purchased your house in June of 2019 for $250,000 and you don’t make any major upgrades during the time that you own it. Later on you decide to sell you house and you sell it for $325,000. In this example, your gain, or the money you made on the sale, is $75,000. If you lived in the home as your primary residence for at least two years, you report the sale on your taxes but the entire $75,000 is excluded from being taxed. You received $75,000 and you didn’t have to pay any taxes for it. That’s a SERIOUS benefit.

What if you sold the house after living there only one and a half years? The entire 75,000 you made on the sale of the home is taxable by both the federal government and the state government. This would cost you more than $18,750 in state and federal taxes (depending on your tax bracket and other variables of course). Even if you turn around and buy another house, you will be held liable to pay the tax on the gain you received.

It’s important to understand the impact that your real estate transaction can have on your financial situation and also your tax situation for the year. Staying a few extra months in a home could mean big savings for you in the long-haul, and understanding this situation could also keep you from jumping into the next highest tax bracket by realizing taxable income that could’ve been non-taxable with a few small tweaks.

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