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.

Know Thy Neighbor… and Neighborhood too

When searching for a home it’s great to shop online, and honestly, that’s the only way to be successful these days for the average homebuyer. While you can find out many details about the house you’re interested in, it’s almost impossible to learn about the area and the neighborhood unless you KNOW the area and the neighborhood. In Charlotte, one street can make all the difference between luxury living and “wouldn’t walk my dog there on a dark night,” so what can you do?

Many of my clients will ask my opinion, which I am always hesitant to give out for two reasons: one, anything I can say can be construed as trying to steer you one way or another (which is illegal), and two, I don’t have a good baseline of what you consider “safe” or “good” so any opinion I have might not align with what you’re looking for.

Case in point: I had a friend live with me for a few months and after the first week she said that she couldn’t believe that I lived in such a “rough” area. For context, I do live on the edge of two distinct neighborhoods, if you turn one direction out of my driveway you will see new homes ranging from 600-800k, and if you go out the other direction you will see questionable characters standing on street corners. I generally understand where my friend was coming from, but I also don’t agree with her. Alas, this is why I am so finicky about sharing my personal opinion, and instead I offer some options for my clients to make their own best decisions.

Safety

As with my friend, one person’s “safe” is another person’s “no way” so there are tons of online resources that I give to my clients including the Charlotte-Mecklenburg police department website, CrimeMapping.com and AreaVibes.com. It’s important to know that negative reports will always outweigh the good and it’s equally important to see what a rating would be for a city you know and are familiar with. You might just see that your lovely hometown doesn’t fair as well as you thought it did in these website ratings.

What’s most important, and something I stress that all of my clients do, is to drive around a neighborhood that they may be interested in. And I don’t just mean a quick drive on a sunny Sunday afternoon. What I actually mean is go there around dusk on a Friday night, drive through at midnight, take an extra few minutes one morning and drive what your commute to the office would be from that neighborhood. You would be surprised what you can find out about a neighborhood by taking a few extra minutes there.

Also, during your drive through I recommend taking a walk down a few streets during a time when people have just gotten out of work and will be the most active outside. This gives you an opportunity to say hello to the neighbors. While it can be a bit uncomfortable to speak to someone, most people are happy to talk about their neighborhoods and to connect over the mutual interest. They will also tell you the good and the bad, and will be much more candid with you than the sellers or their agent will be with me.

Fun example: in that 600k-800k part of my neighborhood there are a few older homes sprinkled throughout. One of those homes illegally keeps chickens on the property. This is a well-known detail within the neighborhood, they’ve been there for eons but how would you feel if your first Saturday morning in your new half-million dollar home started with a rooster crowing at 6:30am? While I’m certain it’s against city ordinances to keep farm animals within the city limits, there’s also something to be said for getting grandfathered in because you’ve been around for the last 25 years living your best chicken-keeping life in the same house, on the same block. Who are we to stop them?

Schools

A parent’s choice for their child’s education is deeply personal and has a hefty impact on that child’s future, so it’s a big deal. I have had appointments on the same day with different families, and one family thinks school X is absolutely amazing but only a few minutes later I hear that school X is absolutely terrible and this second family only wants their child to go to school Y. Both sets of parents are right. Everyone is entitled to their opinion and everyone is entitled to pick their child’s education. Do not give me or any other real estate professional the power to tell you otherwise. Again, jump online and look at some school ratings, find the PTA and parent groups on social media, and talk to someone who has their kids in that school. You can ask all of the questions and get the unfiltered answers from the people who really know, and then make the best decision for you and your family.

It’s also important to note that school districting lines change every few years around here, so if there’s a school that you would like your child to be in it’s imperative that you go the extra mile. I can confirm with the seller’s agent and call the school district to double-check, however, there may be changes in the future that I’m unaware of. Parents and students that are going to be directly impacted by a change are the best to know details, so again, talk to your school’s PTA and parent groups for any pending details.

Here are some additional school resources, and of course there are more out there depending on where in Charlotte you’re interesting in buying:

  • Greatschools.org – widely known for rankings
  • MeckEd – shows some additional statistics for rankings in Charlotte-Mecklenburg and where they’re expected to go over the next few years
  • SchoolDigger – includes data from National Center for Education Statistics, U.S. Department of Education, the U.S. Census Bureau and the North Carolina Dept of Public Instruction
  • Charlotte-Mecklenburg School District