If you’re planning to sell your Texas home or you’re already in the process of selling in this vigorous housing market, you’re likely anticipating a nice profit; otherwise known as “capital gains.” You might even be mentally planning what you’ll do with the extra wad of cash. But, slow down! Before you have that money spent, remember: The tax man cometh! Uncle Sam will come knocking for his piece of the “capital gains tax” pie! Capital gains taxes are what you are required to pay on the profit made from the sale of your home. This can also include any property or possessions, such as a shop or farm equipment, included in the sale that earned you a profit. However, if you understand how the capital gains tax works, there are some ways to minimize and even outright “avoid” those taxes. Here’s a few things to know about capital gains tax:
Short Term vs Long Term
Short-term capital gains apply to your home sale profit if you owned the property for less than one year. In this case, you’ll pay regular taxes based on your regular tax bracket. Long-term capital gains apply if you owned the property for over a year. Rates on long-term capital gains are significantly less and can be down to nothing depending on the seller’s income, filing status and qualifying exemptions.
Tax Code Exemption
As a Texas homeowner, there’s a chance you won’t have to pay capital gains taxes on your home sale thanks to some built in tax code exemptions. You may not have to pay capital gains taxes if you made up to $250,000 in profits on your home sale if you are filing individually or up to $500,000 if you are filing jointly (or head of household). However, there are four stipulations: 1) The house must be your primary residence. 2) You must have owned the house for at least two years. 3) You must have lived in the home for two of the past five years. 4) You can’t have filed an exemption on any other property in the last two years.
If you don’t qualify for the exemption above, you can still avoid paying capital gains if your 2021 income is less than $40,400 and you’re filing individually or less than $80,800 if you’re filing jointly (or head of household). If your income meets this criteria you will likely not have to pay capital gains on your home sale.
The typical capital gains tax rate is 15 percent for those who make between $40,401 and $445,850 individually or between $80,801 and $501,600 for those married/filing jointly in 2021. In Texas, the most you can be taxed on your home sale is 20 percent. This is for taxpayers who make more than $445,850 filing individually or $501,600 married/filing jointly.
How You Got Your Home
How your capital gains taxes are calculated will also depend on how you obtained your home. It could be you purchased the home, inherited the home, or someone outright gifted it to you. You may want to consult a tax expert on your tax rate, as they can be a little tricky especially if you inherited your home or if it was a gift.