Last updated on August 2nd, 2023 at 07:10 am
Selling your home can be both exciting and nerve-wracking.
But before you start counting your profits, it’s important to understand how capital gains taxes may impact your sale.
In Texas, there are specific rules and regulations surrounding capital gains taxes on home sales that every homeowner should know.
The taxes you might owe should be taken into account when selling a home in Texas along with a number of other issues.
However, in some circumstances, you are still responsible for paying federal taxes. Let’s examine the taxes you might owe when you sell your Texas house in more detail.
What are Capital Gains
Understanding capital gains and the taxes associated with them is important when it comes to real estate taxes. If you are looking into capital gains, then you interested in your investments and the tax liability you are responsible for.
When you sell a house for a profit of any type, you must pay these taxes.
This rule applies to any asset you’ve owned for longer than a year and that you were able to sell for a profit, not only homes.
The explanation is that you are making money by selling something, which is seen as a business transaction for taxation purposes.
People should be aware of two types of capital gains.
If you’ve owned the property for less than a year, short-term capital gains will be taxable on the selling of your home.
The amount you would pay would be based upon your tax bracket.
You will be responsible for paying income taxes at your standard tax rate. Long-term capital gains are another possibility, and they will be relevant if you owned the asset for more than a year.
Rates on long-term capital gains are far lower and, depending on exemptions, seller income, and filing status, they may even be zero.
Is Your Capital Gains Tax Exempt
It’s likely that you won’t owe tax liabilities on the sale of your Texas house.
In fact, due to exclusions incorporated into the tax legislation, many homeowners wind up without paying them.
But how can you tell if you’re eligible?
It’s all about the purchase price.
Buyers who purchased a property [and have a profit of more than $250,000, or $500,000 for a married couple] won’t be able to claim the exemption.
You will have to pay capital gains on the sale of the home!
In Texas, you can avoid paying capital gains tax on the sale of your home But there are a few caveats
- The home must be your primary residence.
- The owner must have lived in the home for at least 730 days during the five-year period.
- The last restriction is that you cannot have used this exemption on another property during the previous two years.
- You can only claim this exemption once every five years.
If you don’t meet the primary residence requirement, you may still be able to exclude a portion of your capital gain from taxes by using the capital gains exclusion for home sellers.
If you satisfy those conditions, you probably won’t owe capital gains taxes on the sale of your Texas house if the proceeds are less than those sums.
However, if your profits exceed those limits listed above, you will still be required to pay capital gains taxes on them.
Of course, you will still need to pay tax to the IRS if you don’t meet all of these standards. The capital gains tax rate in Texas is currently 6.25%.
And if you wanted to know, the capital gains tax exemption is not applicable to rental properties or second homes.
How Much Do Gains Cost
A buyer must pay capital gains on the sale of a Texas house if they don’t qualify for an exemption.
However, the amount you pay varies based on the circumstances and your income tax rate
Meaning it [the amount owed] may depend on your income tax bracket.
According to the most recent IRS standards, there are several levels that you should take into account.
Even if you don’t qualify for the exemption, you may still be able to avoid paying capital gains taxes.
For example, if your annual income is less than $39,375 for single filers and $78,750 for married couples filing jointly or as head of household; you are not required to pay capital gains on the sale of your property if that is your income level.
- The capital gains tax rate that is most frequently used is 15%. Anyone who earns between $39,376 and $434,550 per year as an individual, or between $78,751 and 488,850 per year for those who are married filing jointly, or who are the head of household, is subject to this. If you complete these requirements and sell your home for $250,000, for instance, you will owe $37 500 in capital gains taxes.
- The maximum tax on the selling of your Texas house is 20%. If you earn more than $434,550 for single taxpayers and $488,850 for joint filers, this would apply to you. A home sale for $250,000 would then include a $50,000 capital gains tax payment.
So if you profited on the sale of your property, you will need to file both a federal tax return and a state tax return
The excellent thing is that since your property was sold in Texas, you won’t have to pay additional state capital gains taxes on top of any possible federal taxes to the government.
Don’t Forget about Property Tax
You are liable for paying property taxes as long because you still own your home in Texas. Unfortunately, Texas ranks among the most expensive states to live in that regard.
Texas homeowners pay $3,327 in real estate taxes on average, ranking fifth in the nation and being 59 percent more expensive than the typical American taxpayer.
Be aware that you will be liable for the tax until you sell your home. Although those regulations may soon change, keep them in mind if your closing takes much longer or you’re considering selling your home right away. The more you are responsible for, the longer you wait.
How Do I Avoid the Expenses
Most people will probably get more money when they sell their house than the price they paid for it, particularly in the current market; and in most other of Texas’s major markets.
If you make a profit, the capital gain will be taxed. If you’re wondering how to avoid paying capital gains tax on real estate [there are many ways to], one strategy is to refuse any offers that total higher than the $250,000 (or $500,000) that you originally paid for the property in order to be eligible for the exemption.
In other words the sale price of the home is important!
Your cost basis will also lower any possible capital gains on the sale of the home if significant additions or home renovations were performed.
Additionally, homeowners can invest their winnings in a similar property through 1031 exchanges to actually pay capital gains taxes on their Texas properties.
Your real estate agent may be able to direct you to a tax professional who can give you more information.
With a 1031 exchange, you can exchange like-for-like property while deferring the home’s tax. If you wish to think about a 1031 exchange, speak with your accountant since this strategy is frequently employed by firms. They can give you the advice you need based upon your specific situation.
You can use tax losses from depreciating assets to offset your capital gains. If you invest in real estate, it can be advantageous for you to sell some of your holdings at a loss to balance off the gains on other holdings.
This practice is referred to as tax harvesting. It is essential to contact with a tax expert if you wish to try this in order to affect your capital gains tax
Remember to get the assistance of experts in the industry like a realtor.
The tax code is complicated and getting tax advice from anyone other than a professional is not advised.
Can I avoid capital gains tax by selling my home to a family member
Selling your home to a family member does not necessarily exempt you from paying capital gains tax.
- The IRS has rules in place to prevent people from using this tactic to avoid taxes.
- If the sale is not conducted at fair market value, the difference between the sale price and the fair market value will be treated as a gift and may be subject to gift taxes.
- Additionally, if the buyer does not use the property as their primary residence or does not meet other qualifications, they may still be liable for capital gains tax when they sell the property in the future. It’s best to consult with a tax professional
Are there any exemptions or deductions available
Any improvements made to the property can be deducted from the profit to reduce the taxable amount.
What happens if I don’t pay my Tax in Texas
The IRS wants to know about any capital gains made from the sale of stocks, real estate, or other capital assets.
- If you fail to include the information in your tax filing, the IRS will most likely find out through another reporting mechanism.
- The IRS has the authority to levy fines and penalties for your carelessness, and they frequently do so. They can seek criminal prosecution if they can show that the act was intentional, fraudulent, or intended to evade payment of legitimate taxes. Seek help from your tax professional.
Receive a Cash offer on your Property
Other options would be to sell your house to a cash buyer like us and simply walk away without having to make any repairs or pay any closing costs.
Investors will purchase your home in any condition and will pay for the home quickly after determining the value.
Sellers won’t be responsible for any fees or additional commissions.
This means you won’t have to pay commission to a realtor or list the property on the MLS.
We can write up an easy to read contract and get the buying process started.
And if a seller owes taxes on the investment property, we can help alleviate any outstanding issues you might have with the government.
By working with a buyer (with experience), this might mean more money in your pocket
Frequently Asked Questions
Capital gains are defined as the profit realized from the sale of certain types of assets, such as stocks, bonds, and real estate. In order to be subject to capital gains taxes in Texas, you must have sold the asset for more than you paid for it.
A Texas resident is an individual who is domiciled in Texas, or an individual who is not domiciled in Texas but who maintains a permanent place of abode in Texas and spends more than 185 days of the year in the state.
With over 15 years of unwavering dedication to the Texas real estate market, Andrew Reichek is your trusted partner in achieving your real estate dreams. As a licensed Texas Real Estate Broker, Andrew’s unparalleled experience and expertise make him the go-to choice for both buyers and sellers. His extensive knowledge of the local real estate landscape and commitment to delivering exceptional service have made him a recognized authority in the industry.