As you embark on the exciting journey of selling your Boston home, it’s essential to consider the potential tax implications. While the prospect of a significant payout can be exhilarating, understanding the tax landscape will help you maximize your financial gains. If you made a profit on the sale of your home, you may to pay capital gains taxes. Having some understanding of the pertinent tax rules can help you minimize your tax bill. So let’s take a look at the tax implications of selling your home in Greater Boston.
The Likelihood of Capital Gains Tax
Given the robust real estate market in areas like Quincy, Brookline, Reading, Lynnfield, and all of Greater Boston and the significant appreciation many homes have experienced, it’s highly probable that you’ll face capital gains taxes when selling your home. These taxes are levied on the profit realized from the sale of capital assets, including your beloved Boston abode. If your home as appreciated significantly, as is often the case, you’ll get a large payday when selling your home in Greater Boston. But you will also probably owe the IRS money for the profits earned on the sale.
“The biggest question at tax time for someone who recently sold a home is whether they’ll have to pay federal capital gains taxes on the profit. In short, capital gains are the amount of money you make from selling capital assets – property like homes, cars, investments, and other high-value items.”
It’s important to take into account the substantial increase in home prices from 2020 to 2022. As a result, your home most likely gained considerable capital value, which may lead to tax obligations upon its sale.
Understanding Capital Gains Tax
Now, let’s look at how capital gains taxes work and how they apply when selling your home.
“A capital gains tax is a tax placed on any profits earned when a capital asset is sold. The IRS considers almost everything you own and use for personal or investment purposes to be a capital asset. These taxes are due on the tax deadline after the asset is sold, and it applies to investments like stocks, bonds, and real estate.”
In addition, the IRS has two categories for capital asset gains: short-term gains and long-term gains. When it comes to selling your home, if you’ve lived there for less than a year, you’ll have a short-term gain. If you’ve lived in your home for a year or longer, the gain is considered long-term. When you sell your home, then, “the capital gains tax depends primarily on how long you’ve owned the home and your income.”
“If you have a short-term gain, you’ll be taxed at whatever your normal tax bracket is. A long-term capital gain gets preferential tax treatment and is taxed at a rate of 0%, 15%, 20%, or 28%. These rates vary according to your income and tax filing status. . . . And if you meet certain conditions, you can exclude the first $250,000 to $500,000 from the sale of your home and avoid paying taxes on it altogether.”
In short, capital gains taxes are categorized as either short-term or long-term, depending on how long you’ve owned the property. Short-term gains, from properties owned for less than a year, are taxed at your ordinary income tax rate. However, long-term gains from properties owned for a year or more qualify for preferential tax rates.
How to Avoid Capital Gains Tax: The Exclusion Advantage
Fortunately, the IRS offers a valuable exclusion that can significantly reduce or even eliminate your capital gains tax liability. If you meet certain criteria, you can exclude up to $250,000 ($500,000 for married couples filing jointly) from the sale of your primary residence. To qualify, you must have owned the home for at least two years out of the five years preceding the sale and lived in it as your primary residence for at least two years during that same period.
For such an exclusion, you’ll have to meet these qualifying criteria:
- “You’ve owned the home for at least two years during the past five years prior to the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
- The home was your principal residence for a minimum of two of the five years prior to the sale. For those married and filing jointly, both spouses must meet this requirement.
- “You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.”
If you think you may qualify, be sure to consult a Greater Boston agent, like Hilary Dunlavey. To discover more, call 617.646.9334.
Special Circumstances
Even if you don’t meet the standard exclusion criteria, there are specific circumstances that may qualify you for a partial or full exemption on selling your home in Greater Boston. The special qualifying circumstances include:
- Gaining ownership of the home during a separation/divorce
- If your spouse died during your ownership of the home
- Owning a “remainder interest” in the home when selling
- Having your previous home condemned
- Being a service member during your ownership of the home
- Releasing the home in a “like-kind” exchange
Calculating Capital Gains Tax
If, on selling your home, you want to calculate your probable capital gains tax, you will need to determine the cost basis for the home.
The cost basis includes what you spent to buy your Boston home, plus any eligible improvements made during your ownership. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”
“From there, you can add up the purchase price of the home, minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale.” Subtracting your cost basis from the selling price will determine your taxable gain.
Navigating the Complexities: Seek Professional Guidance
The intricacies of capital gains taxes can be overwhelming. That’s why it’s crucial to consult with a tax professional and a seasoned Boston realtor like Hilary Dunlavey. We can guide you through the process, help you determine your eligibility for exclusions, and ensure you maximize your financial benefits when selling your home. So if you have concerns about the tax implications of selling your home in Greater Boston, be sure to contact us at 617.646.9334.
Let’s Talk Taxes and Real Estate
At Hilary Dunlavey Homes, we’re committed to providing comprehensive real estate services, including expert guidance on tax implications. If you have questions about selling your Boston home and want to explore your tax options, don’t hesitate to contact us. We’re here to help you navigate this important aspect of your real estate journey.