What Are the Tax Implications for Selling a House?

When it comes to selling a house, there are a few tax implications that sellers should know about. Before selling, one question sellers should ask is what are the tax implications for selling a house. When a seller knows about these upfront, it can create a smoother transition as well as greater financial planning.

What Tax Implications Go Along With Selling a House?

Selling a house comes with many considerations, including emotional, logistical, and financial. Knowing the tax implications and other costs that come with selling a house helps to ensure that everyone involved is financially prepared for the sale. Some of these taxes and costs include:

• Real estate transfer taxes
• Escrow fees
• Titles
• Commissions
• State and federal capital gains

Real Estate Transfer Tax

In real estate, the seller generally pays a real estate transfer tax. It is levied whenever property ownership changes hands. Sometimes, it can be negotiated to split the cost with the buyer.

The current transfer tax rate in South Carolina is $1.85 per $500 of the property’s sale value. For example, if your home sells for $250,000, you will divide $250,000 by $500, resulting in $500. Multiplying 500 by $1.85 gives you a transfer tax of $925.

Escrow Fees

Escrow fees are a part of the closing costs that come with buying a house. Generally speaking, it is a fee paid to a third party for managing the funds during the real estate transaction. The cost of escrow services generally depends on the home’s sale price and other contributing factors. These fees ensure that finances are handled securely and distributed correctly once the sale is finalized.

Title Fees

Title fees are expenses paid to ensure that the property has a clear title and is free from any liens or any other legal issues that could prolong the sale. If there are areas in the title that are not clear, the seller could be responsible for rectifying these unclear issues. Typically, this will result in additional costs.

Real Estate Agents Aren’t the Only Ones Who Get Commissions

There are many professionals involved in the home-buying process who will need to be paid for their service. This includes real estate agents, attorneys, advisors, or surveyors. For example, real estate agents usually charge a commission based on a percentage of the sale price. Attorneys or other hired assistants will have their own fees as well.

Federal and State Tax on Capital Gains

South Carolina currently has a tax on capital gains of 7% of the profit made from the sale of the property. However, 44% of the gain is exempt from this tax, which reduces the tax rate to 3.92%.

The tax on capital gains rate on the federal level depends on how long you have owned the property and your income level. For properties owned for more than one year, the rates for long-term tax on capital gains are 0%, 15%, or 20%, based on your income level. If the property was held for less than a year, the profit is subject to short-term tax on capital gains, which can be as high as 37%.

Calculating Capital Gains

To determine your capital gains, follow these steps:

• Calculate your basis. Start with the original purchase price of the home and add the cost of any improvements you’ve made over time.
• Calculate your realized amount. Take the final sale price of the home and subtract any fees.
• Determine your profit or loss. Subtract your basis from the realized amount, and this will give you the capital loss or gain.

Section 121 Exclusion

One of the most prevalent tax benefits is the Section 121 exclusion. This is available to homeowners who qualify. This benefit allows a homeowner to exclude up to $250,000 of capital gains from their primary residence sale if they are single or up to $500,000 if they are married and filing jointly.

FAQs

Q: Do I Pay Taxes to the IRS When I Sell My House?

A: When you sell your house, you may be required to pay tax on capital gains to the IRS on the profit you made from the sale. However, there are some exemptions. If the house was your primary residence for at least two of the five previous years, you can exclude up to $250,000 of the gain if you are single or up to $500,000 if you are married and filing jointly.

Q: How Can I Avoid Tax on Capital Gains?

A: Avoiding tax on capital gains is typically done through primary residence exclusion, which allows a single person to exclude $250,000 of the gain and married couples filing jointly to exclude $500,000. A person can also avoid capital gains through a like-kind exchange where they use the proceeds of one investment property to buy another similar one.

Q: Do You Have to Pay Capital Gains When You Inherit a House?

A: Generally speaking, a person may not have to pay capital gains when they inherit a house due to circumstance. When you inherit a house, the property’s basis is adjusted to its market value at the time of the owner’s death. Therefore, there may not be much, if any, capital gain if you sell it shortly after. However, if the value does increase when you sell, you may be subject to tax on capital gains.

Q: What Taxes Do I Need to Pay When I Sell My House?

A: When you sell your house, you may need to pay tax on capital gains on the profit you make from the sale. Additionally, there may be state or local real estate transfer taxes that you have to pay. In addition to this, there are other fees associated with selling a house, such as real estate commissions, escrow fees, and home inspection fees, among others.

Contact Mack & Mack Attorneys

When selling a house, there are various tax implications and additional costs involved. Consulting with an attorney can provide the guidance you need to ensure you make the most informed decisions when selling your property. Mack & Mack Attorneys can help. Contact us to speak with someone today.