Paying taxes isn’t fun. It’s an immense pain in your assets. That’s why most people try to avoid incurring a tax burden no matter the circumstances, but it’s best to know the taxes when selling your house.
Does that sound like you? If so, you’re in the right place.
This article lists the most commonly encountered taxes when selling your house, property taxes, and exemptions. It explains how to reduce your tax burden.
House Selling Taxes and How They Work
You might not have to pay taxes when you sell your house. If you make a substantial profit, you may be subject to capital gains taxes. These are different from ordinary income tax rates.
Your property is a capital asset; that designation also includes your home. Suppose you decide to sell your home; the profit you make from the sale has the potential to push you into a higher tax bracket and trigger the capital gains tax.
There are two categories of capital gains:
- Long-term capital gains happen when you sell an asset that you’ve had for more than one calendar year, like your home.
- Short-term capital gains occur when you sell an asset you’ve had for less than a year.
Tax rates vary, but long-term capital gains generally enjoy a smaller tax rate than short-term capital gains. Typically, long-term capital gains tax rates vary from 0% to 20%, while short-term capital gains taxes can range from 12% to 37%.
Here’s the thing about capital gains, they only kick in if you have realized gains. In other words, you’ll only be subject to a tax bill if you sell your asset for more than the cost basis or purchase price.
Capital Gains Tax on a House
Do you have to pay capital gains tax on a house? Well, it depends.
You may be exempt from capital gains tax from the sale of your home due to the Taxpayer Relief Act of 1997.
When you sell your home for more than you bought it, you may have to pay capital gains tax, but here are the exemptions that apply.
If you’re single AND have lived in the house as your principal residence (main home) for two to five years immediately before the sale, the first $250,000 profit you make on the home is tax-free. You can double the amount to $500,000 if you’re married and are joint tax return filers.
Here is an example of how that situation might work. Suppose you bought a house 7 years ago for $100,000. You’ve lived in the house for those 7 years as your main home. Then, you sell the home for $350,000. That $250,000 profit is not taxable income subject to capital gains tax.
One key factor about the capital gains tax is that it refers to your profit from the sale of the house, not the income.
Property Tax Rates
You pay property taxes to fund critical infrastructure projects like city streets, emergency medical services, firefighters, and public schools. These taxes are essential when buying your home because they are part of the cost of homeownership.
You pay real estate taxes as a property owner to the county or local tax office. Your property tax rate is based on the official assessment of your home’s value. Typically, you’ll pay your state’s property tax rate monthly as part of your mortgage payment.
Once you pay off your home, you’ll get a bill in the mail from the county or local tax authority.
Individual states have their tax rates, but the tax office will generally determine your property tax using an assessor’s report.
The assessors determine your property tax total by multiplying three variables:
- State tax rate
- Assessment ratio, a portion of the property subject to tax
- Property value
The amount of tax the assessor determines is called a mill levy. The mill levy is one-tenth of one cent.
| Mill levy | |
| $1,000 of assessed property | $1 property tax |
Tax Rate By State
This data is based on WalletHub’s 2022 report, which relied on 2019 Census.gov metadata. There may be slight differences in the numbers below and other reports, and prices may change based on market conditions.
| Rank | State | Real Estate Tax Rate | Average Home Price | Annual Property Tax |
| 1 | Hawaii | 0.28% | $615,300 | $606 |
| 2 | Alabama | 0.41% | $142,700 | $895 |
| 3 | Colorado | 0.51% | $343,300 | $1,113 |
| 4 | Louisiana | 0.55% | $163,100 | $1,187 |
| 5 | District of Columbia | 0.56% | $601,500 | $1,221 |
| 6 | South Carolina | 0.57% | $162,300 | $1,238 |
| 7 | Delaware | 0.57% | $251,100 | $1,240 |
| 8 | West Virginia | 0.58% | $119,600 | $1,269 |
| 9 | Nevada | 0.60% | $267,900 | $1,310 |
| 10 | Wyoming | 0.61% | $220,500 | $1,319 |
| 11 | Arkansas | 0.62% | $127,800 | $1,358 |
| 12 | Utah | 0.63% | $279,100 | $1,362 |
| 13 | Arizona | 0.66% | $225,500 | $1,446 |
| 14 | Idaho | 0.69% | $212,300 | $1,492 |
| 15 | Tennessee | 0.71% | $167,200 | $1,548 |
| 16 | California | 0.76% | $505,000 | $1,644 |
| 17 | New Mexico | 0.80% | $171,400 | $1,740 |
| 18 | Mississippi | 0.81% | $119,000 | $1,751 |
| 19 | Virginia | 0.82% | $273,100 | $1,779 |
| 20 | Montana | 0.84% | $230,600 | $1,818 |
| 21 | North Carolina | 0.84% | $172,500 | $1,833 |
| 22 | Indiana | 0.85% | $141,700 | $1,853 |
| 23 | Kentucky | 0.86% | $141,000 | $1,866 |
| 24 | Florida | 0.89% | $215,300 | $1,934 |
| 25 | Oklahoma | 0.90% | $136,800 | $1,952 |
| 26 | Georgia | 0.92% | $176,000 | $2,006 |
| 27 | Missouri | 0.97% | $157,200 | $2,111 |
| 28 | Oregon | 0.97% | $312,200 | $2,116 |
| 29 | North Dakota | 0.98% | $339,000 | $2,138 |
| 30 | Washington | 0.98% | $193,900 | $2,134 |
| 31 | Maryland | 1.09% | $314,800 | $2,370 |
| 32 | Minnesota | 1.12% | $223,900 | $2,429 |
| 33 | Alaska | 1.19% | $270,400 | $2,599 |
| 34 | Massachusetts | 1.23% | $381,600 | $2,667 |
| 35 | South Dakota | 1.31% | $167,100 | $2,857 |
| 36 | Maine | 1.36% | $190,400 | $2,953 |
| 37 | Kansas | 1.41% | $151,900 | $3,060 |
| 38 | Michigan | 1.54% | $154,900 | $3,343 |
| 39 | Ohio | 1.56% | $145,700 | $3,390 |
| 40 | Iowa | 1.57% | $147,800 | $3,407 |
| 41 | Pennsylvania | 1.58% | $180,200 | $3,442 |
| 42 | Rhode Island | 1.63% | $261,900 | $3,548 |
| 43 | New York | 1.72% | $313,700 | $3,749 |
| 44 | Nebraska | 1.73% | $155,800 | $3,754 |
| 45 | Texas | 1.80% | $172,500 | $3,907 |
| 46 | Wisconsin | 1.85% | $180,600 | $4,027 |
| 47 | Vermont | 1.90% | $227,700 | $4,135 |
| 48 | Connecticut | 2.14% | $275,400 | $4,658 |
| 49 | New Hampshire | 2.18% | $261,700 | $4,738 |
| 50 | Illinois | 2.27% | $194,500 | $4,942 |
| 51 | New Jersey | 2.49% | $335,600 | $5,419 |
<iframe src=”https://cdn.wallethub.com/wallethub/embed/11585/property-geochart1-2022.html” width=”556″ height=”347″ frameBorder=”0″ scrolling=”no”></iframe><div style=”width:556px;font-size:12px;color:#888;”>Source: <a href=”https://wallethub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585″>WalletHub</a></div>
Know Tax Exemptions For State Home Buyers & Sellers
To make sure you pay the right amount of taxes, you need to know tax exemptions for home buyers and sellers. First, we’ll go over exemptions and ways to mitigate your tax burden from capital gains; then, we’ll dive into property tax exemptions.
Capital Gains
Primary residence exclusion
Let’s recap the home seller’s exemption provided by the Tax Relief Act of 1997. Remember, you’re eligible for a $250,000 exemption if single and a $500,000 exemption if married filing jointly if you:
- Owned the home for at least two years
- Lived in the property as your principal residence for at least two years
- Not used the tax break for the sale of another home in the past two years
That means the first $250,000, or $500,000 for married couples, is tax-free. Profit refers to the net income after closing costs and other expenses. This exemption does not apply to a second home.
Partial home sale exemption
A partial home sale exemption, or a partial exclusion of gain, enables you to claim part of the tax break even if you don’t fulfill all the requirements.
You may get the partial exclusion of $125,000 if you lived in the home for one year AND you have a valid reason to sell, including changes in:
- Circumstances that make it necessary to sell your house
- Employment
- Health
Increase your cost basis
The cost basis of your home is your purchase price. You can make adjustments to the original cost basis and decrease your profit by including the following homeowner’s expenses and fees:
- Additions
- Capital improvements
- Depreciation
- Home improvements
- Renovations
Losses
You might have investments and incur losses in a tax year. You can offset the capital gains on your home by claiming those qualifying losses on your federal tax return.
1031 Exchange
You can avoid paying taxes on your capital gains from the sale of a home by reinvesting the profit from the sale of the house into another similar investment property. You would use a Like-Kind Exchange under IRS Section 1031.
There are some stringent requirements for this type of exchange, including:
- The like-kind property must be an investment property, not your principal residency
- You must hold the rental property for five years
A 1031 exchange is complicated, so discussing this option with your financial advisor, tax professional, or attorney is best.
Property tax exemptions
Sometimes, property types and individuals are exempt from property tax. Let’s cover the most common exemptions you might be entitled.
Homestead exemption
A homestead exemption is available in most states and lets you exempt some of your property’s value from the tax. You must use the home as your primary residence to benefit from the exemption.
The rules governing the homestead exemption vary from state to state. Some locales allow you to exclude a flat rate from your home’s value, while others will allow you to deduct a percentage of the home’s value.
Senior citizen
Once you get old enough, typically 65, you may be entitled to property tax exemptions. The laws and regulations vary by state and are often subject to your:
- State
- Income
- Residency
Disabilities
Some programs for people with disabilities may allow them to receive property tax exemptions. Each state has laws controlling the kind and scope of the tax relief they provide.
Veterans
Military veterans and active duty members may qualify for property tax exemptions depending on where they live.
Income
You may be exempt from property taxes if you’re a low-income earner. You can check local and state laws for clarity.
Is Selling The Right Option?
You might decide you’re tired of paying property taxes on your home, or maybe you have a house you inherited, and it’s become a hassle. You’ll surely be asking, “should I sell my home?”
To answer that question, you need to evaluate your financial situation to determine the following:
- Your equity
- Affordability of a new home
- Cost of selling
To guide your evaluation, we’ve curated a list of questions you need to ask yourself to determine if selling is the right option for you.
What’s my home worth?
Research homes in your area that have sold that are similar to yours. These homes are called comps and provide the best baseline and most accurate estimate of your home’s value.
Here are some things to keep an eye out for when looking at comp selling prices:
- Bedrooms
- Bathrooms
- Square footage
- Amenities like a pool or outside area
If you want more than an estimate, request an offer from us. It’s free and fair, and you have no obligation to accept. We evaluate your home based on the following:
- Home information
- Market trends
- Data from comps
We purchase houses all over the United States and have a team of experts ready to serve you.
What’s my equity?
You want to ensure that you have enough money to pay off your mortgage, the preparation expenses, closing costs, and moving expenses. You may also want to wait until you’re sure you have enough equity to make a down payment on your next home.
How much are closing costs?
Typically, your closing costs will be 1% to 3% of the total home sale. Our in-depth closing costs guide breaks down what you’ll usually run into when selling your home.
Here is an example of what closing costs might be for you. That means if your home sale were for $440,300, the median sales price in the US, then you would pay $4,403 to $13,209. You’ll also have to pay about $26,000 to a real estate agent.
How long will it take to sell my home?
Local markets and trends will control how long your home will stay on the market. This is called “days on market” (DOM). In the United States, the average DOM is 42 days.
Conclusion
There is a chance that you won’t have to pay capital gains taxes on your home sale. Remember, you might be protected by primary residence exclusion of $250,000 if you owned, lived in, and not used the exclusion in the past two years.
Property tax rates are a whole different animal, though. You will most likely have to pay property taxes unless you qualify for an exemption, including:
- Homestead
- Senior citizen
- Disability
- Veteran status
- Income
Ultimately, you may decide that taxes are too onerous, and you want to sell your home. Be sure to ask yourself the following questions when deciding to sell:
- What’s my home worth?
- What’s my equity?
- How much are closing costs?
- How long will it take to sell my home?
If you don’t want to deal with the hassle of going through the complicated process of selling your home, contact us for a no-obligation offer. We’ll walk you through our approach, and you’ll have a quick and fair cash offer in virtually no time.
We work with you to sell your house on your terms!
