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William Perez is a tax expert with 20+ years of experience advising on individual and small business tax. He has written hundreds of articles covering topics including filing taxes, solving tax issues, tax credits and deductions, tax planning, and taxable income. He previously worked for the IRS and holds an enrolled agent certification. If you determine that you’re eligible for an exemption, take action to file the paperwork as soon as possible. You might be able to save thousands of dollars through a couple of minutes of research and a quick filing process.
If you or your family use the home for more than two weeks a year, it’s likely to be considered personal property, not investment property. This makes it subject to taxes on capital gains, as would any other asset other than your principal residence. If the sales price is $250,000 ($500,000 for married people) or less and the gain is fully excludable from gross income. The homeowner must also affirm that they meet the principal residence requirement. The real estate professional must receive certification that these attestations are true.
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To see which local governments in Washington have imposed which sales taxes and at what rates , see our Tax and Population Data page. However, this nonresident exemption was significantly changed during the 2019 legislative session. ESSB 5997 , now requires all sales to be taxed at the time of purchase rather than allowing for the exemption to be applied at the time of purchase.
Your capital gain—or loss—is the difference between the sales price and your basis in the property, which is what you paid for it plus certain qualifying costs. You would have a gain of $200,000 if you purchased your home for $150,000 and you were to sell it for $350,000. You wouldn't have to report any of that money as taxable income on your tax return if you're single, because $200,000 is less than the $250,000 exclusion. Many homeowners avoid capital gains taxes when selling their primary home, but there are stipulations.
Qualifying for the Exclusion
The measure requires voter approval, and unlike most local revenue options it may only be submitted at a primary or general election and may not be submitted at a February or April special election. Another unique feature is that motor vehicle sales and the first 36 months of a motor vehicle lease are exempt from this portion of the sales tax. The total combined rate may not exceed 0.5%, and just like the “first half” the statute provides mechanisms for credits and revenue sharing to make sure the limit is not exceeded.
This is a complicated process that requires an intermediary to manage the rollover, and you’re required to follow specific guidelines. For example, 1031 exchanges are only available on rental properties , so if you want to take advantage of this tax-deferred exchange, you’ll need to convert the property to a rental property first. And you’re limited to doing one 1031 exchange every five years.
Reporting the Sale
Individuals who met the requirements could exclude up to $125,000 of capital gains on the sale of their personal residences. Among other selling-related costs and fees, sellers are responsible for paying real estate transfer taxes, which are also called a government transfer tax or title fee. The transfer tax on selling a house is calculated as a percentage of the sale price. The rate varies widely by state, and even from one city to the next. If you won’t qualify for any capital gains tax exemptions, it’s best to know how much you’ll owe ahead of time so you have a better idea of your final profit.
If you have a property tax exemption, you don’t have to pay that particular tax when you’re filing your taxes. If you have a deduction, the amount of the deduction simply lowers the income that you have to pay the tax on. States often provide tax exemptions for senior citizens who have reached certain ages. Some areas may base eligibility on Social Security status. The details of the senior exemption vary based on the state, and there are often residency and income restrictions. Some of the statutes just defer the taxes until the property is sold.
Do you pay capital gains if you lose money on a home sale?
If so, you don’t need to allocate the gain to the business portion of the home. If you’re interested in doing a 1031 exchange, talk to your real estate agent, tax professional and attorney first. Even if you can’t exclude all of your home sale profit, there are other scenarios where you may be able to partially lower your taxable profit.
First, you must have lived in the home for at least two of the last five years of ownership. And the profits are taxable if they exceed $250,000 for single filers or $500,000 for joint/married filers. To figure out how much you owe in capital gains tax when selling a second home, you’d need to first calculate the actual profit from the sale.
You can calculate and claim a partial home sales exclusion based on the amount of time you actually lived in the residence if you qualify under one of the special rules. There may also be other ways to avoid being liable for capital gains tax. You and your spouse are married and file as married filing jointly. The passage of the 1997 law, allows an excludable gain to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. At closing, you’ll pay taxes prorated up to the closing date .
This would mean that if youco-owned a house with another individual, but were unmarried, each individual could exclude $250,000 of capital gains from taxation. Getting divorced or being transferred because you are military personnel can complicate a taxpayer’s ability to qualify for the use requirement for capital gains tax exclusions on home sales. Fortunately, there are considerations for these situations.
Your property must be your primary residence, not an investment property, to qualify for the home sale exclusion. The home must have been owned and used for a minimum of two out of the last five years immediately preceding the date of sale. The two years don't have to be consecutive, however, and you don't have to live there on the date of the sale. Gains in excess of the exclusion amounts are taxed at capital gains tax rates. Below are a few of the most common questions regarding property tax exemptions. Let’s say, hypothetically, a city decides to sign an $800,000 contract for trash pickup and $2 million is spent on maintenance for city parks.
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