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How the New Tax Law Affects a Home Sale Profit!

By
Mortgage and Lending with Blue Ridge Bank Mortgage NMLS # 78989

The income tax reform law offers a lot of changes to many tax payers.  Many are debating the pros versus cons of tax reform.  The main goal of the reform appeared to be to help the American tax payers and further stimulate the economy.  One area of concern in the tax reform law deals with the capital gains tax on the sale of real estate.  First of all, we are not representing this as tax advice or that we are tax professionals.  Rather, we want to share types of questions or topics that sellers, Realtors, CPA’s, mortgage professionals, and more should discuss.  Plus, this discussion should take place before listing the home for sale. We will also show that sometimes paying a tax could be a good thing and others where it is not necessary.

2017 Capital Gains Tax Exclusion on Sale of Home

Per the IRS topic number 701 – Sale of your home, “If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income.  You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse.”.  Sounds pretty good, doesn’t it?  So, how do you get this capital gains tax exclusion?  To qualify in 2017, the seller of the home must have owned and used the home as the primary home for 2 of the last 5 years of ownership.

This may only be done once every 2 years and there are other potential exceptions such as for military, government housing, or installment sales.  It is always important to ask your tax professional to see if you qualify for this exclusion.  This has been a very popular way for homeowners or flippers to buy, occupy 2 years, sell for a profit, and not pay income taxes on the profit.  The profits are not even required to be put down on another property to avoid this tax!  But if the proposed tax bills hold and it is expected to, this exclusion is changing for the worse in 2018.

Will New Tax Proposal be the Death of Real Estate?

 

Will I Pay Income Taxes If I Sell My Home in 2018?

Homeowners want to know, “Will I pay a capital gains tax if I sell my home in 2018 or after?”. So, above were the old rules.  But, there is great news!  Although both the Senate and House versions called for increasing the time frame for exclusion of taxation to 5 out of the last 8 years, the final negotiated version kept it at the last 2 of 5 years!  This would not have killed real estate but it would have definitely had a negative effect.

Should I Sell My House and Pay the Tax?

First of all, if you are paying a capital gains tax, congratulations!  You made a profit on your home after all expenses and hopefully enjoyed the home along the way!  Key points are “profit” and “all expenses”.  You made a profit and you need to remember to calculate the allowed expenses to lower your tax burden.  Items such as Realtor commissions, seller closing costs, seller paid costs for the buyer, and certain improvements made to the home could reduce the taxable profit.  This is one of those areas where having a relationship with a CPA comes in handy.  In addition to the CPA, keep receipts for everything to do with the home.  It could be a write-off when you do sell the home.

Buying a Home After Sellingcapital gains tax 2018

If you are considering a sale before 5 years, then there must be reasons and there are plenty!  Here are a few examples to sell the current home even if the profit will be taxed.  Life happens which means change.  Although, about everyone wants to pay less taxes, there are good reasons to sell.  And again, you are making a profit!

There are many other reasons to sell, pay a potential tax, and purchase another home.  Basically, the homeowner needs to weigh the pros versus the tax as well as have a thorough discussion with an experienced Realtor.

Capital Gains Affect on Military Sellers

Military families are on the move quite often which means buying and selling often.  Service members receive their permanent change of duty station orders (PCS) and usually that means moving the family.  Living in a home 2 out of the last 5 years isn’t so tough.  But, living in a home for 5 years pushes the threshold a lot higher for not having to pay a tax on the gain from sale.  A huge benefit for military sellers is that they can typically purchase the next home with no money down.  This is accomplished through a VA home loan.  Since a down payment may not be required and it is customary (not required) for the seller to pay the service member’s closing expenses, having the whole profit isn’t as important.  Therefore, any profit made on the home could be used for investing, paying debts, or down payment on a new home.

What if Military Buyers Sell in Less Than 5 Years and There is No Profit?

If there is no profit, then there is no capital gains tax to pay!  Keep in mind that just because the sales price is higher than the original purchase price, that doesn’t mean there is a taxable profit.  There are ways to lower that profit or even get rid of the whole thing.  This is another one of those moments where it helps to have a great CPA who can provide solid tax advice.

Prepare for Listing Your House for Salecapital gains tax - russell smith whiteville nc

If a seller is going to depend on a Realtor or tax professional to provide solid advice on selling, it is important to keep documentation organized and safe.  Examples of items to keep for an eventual sale include…

  • Settlement statement or closing disclosure from purchase
  • Closing disclosure from recent refinance
  • Deed
  • Receipts for all home improvements
  • Warranties for appliances and other fixtures
  • Paint, tile, hardwood samples & names to match later
  • Lease contract(s) on the home over last 8 years

Great Opportunities in Real Estate

Hopefully, this article has provided a better understanding of the potential income tax law changes.  Plus, it should help homeowners better prepare for a potential sale.  Although, this could be looked at as a potential negative in selling a home, there are many reasons why the housing market will continue to be strong.  Plus more and more families are looking to buy and be a homeowner.  Check out one of our recent articles “Will new tax proposals be the death of real estate?” and you will see there are a lot of positives for the taxpayer.  Many areas will lower tax burdens which make it easier to buy!

There is certainly opportunity for a lot of upside in real estate.  Just involve professionals in your decision.  The worst part of all of this as a seller would be to be uninformed and find out next tax season that a large, unexpected tax bill is due.  Even worse would be if all proceeds from the previous sale were spent.  No one has a crystal ball you can speak to experts to gather information and make an informed decision.  If you are a seller looking to buy and are concerned about your scenario, contact us to discuss.

Realtors can get in front of this and if approached the right way, will outshine other Realtors.  We have several ways to implement a listing agent strategy that we are happy to share.  Please give us a call to discuss.

Original article on my website

 

This article is not tax advice.  Always seek tax advice from a licensed tax professional or certified public accountant.

Posted by

Russell Smith - Your Mortgage Lending Expert

NMLS # 78989

Comments (4)

Doug Dawes
Keller Williams Evolution - 447 Boston Street, Suite #5, Topsfield, MA - Topsfield, MA
Your Personal Realtor®

Great post Russell Smith Maybe the joint committee will revise that number lower. I'm re-blogging this.

Dec 15, 2017 07:51 AM
Russell Smith
Blue Ridge Bank Mortgage - Wilmington, NC
Loan Officer Communication & Execution You Deserve

absolutely reblog it!  This is important information and if someone has a closing in early January that has occupied the home between 2 and 5 years, they should highly consider trying to close in December to be safe!

Dec 15, 2017 07:56 AM
Ricardo Mello
Manhattan Miami Real Estate - Manhattan, NY
Manhattan & Miami Real Estate Agent

Great piece Russell  

 

We also wrote a recent article talking about CGT: "How Capital Gains Tax Can Be Reduced or Deferred When Selling Property" 

Jan 16, 2019 05:14 PM
Russell Smith
Blue Ridge Bank Mortgage - Wilmington, NC
Loan Officer Communication & Execution You Deserve

Thank you Ricardo. This is very important for sellers and their agents to understand

Jan 17, 2019 03:48 AM