Property and single-family homes are a hot commodity in Houston, with homes selling for $450,000 or more. Despite being a seller’s market, an investment property can come with unexpected challenges. From closing costs and unexpected taxpayer liabilities, including capital gains taxes on a home sale in Houston, selling your property can be overwhelming.
In this article, we outline what capital gains taxes are and what options you have available, such as short-term and long-term capital gains taxes, and exemptions you may already qualify for.
Capital Gains Tax in Houston, Texas
Selling an investment property can be complicated. Thankfully, you can find companies that buy houses in Houston owners know to trust throughout the whole process. One aspect you don’t want to let slip by you is the capital gains tax. Fortunately, Texas does not have a separate state income tax.
What Is a Capital Gains Tax?
When you sell your assets and make a profit from those assets, the sale is subject to capital gains taxes. Capital gains occur when you sell the asset higher than the initial purchase price. Capital assets can be stocks and bonds, silver and gold, or real estate. When it comes to being real estate investors, capital gains are subject to property tax laws.
Gains are taxed based on the length of time you held onto said asset before being sold. Within this timeframe, there are two separate terms in which those assets become taxed. Assets only held for a year or under are taxed under the short-term umbrella, while long-term capital gains are assets you have for longer.
Short-Term Capital Gains
As the name suggests, short-term capital gains are assets that you have had for a short amount of time, typically a year or less. These short-term capital gains become taxed like your ordinary income, as in whatever your taxes are in your usual tax bracket. With these types of assets incurred during a short amount of time, they do not benefit from any kinds of special tax rates.
Long-Term Capital Gains
If you have held onto the asset for longer than a year, it will be subject to the long-term capital gains tax on the profit from the sale. Rates for long-term capital gains are dependent on your tax liability as well as your filing status. These rates range from 0-20% and are typically lower than short-term capital gains tax rates.
A long-term capital gains tax on home sales in Houston is preferable among home sellers as they are much more favorable than short-term options. With lower tax rates, you can limit your exposure by keeping your assets for over a year or more. You can keep rates minimal after paying property taxes in TX using long-term capital gains.
The Personal Residence Exemption
Home sellers who wish to be IRS exempt from capital gains taxes could qualify for up to $250,000 to be precluded from income taxes and up to $500,000 if filing jointly with a spouse.
Eligibility for the tax return exclusion occurs if you have used the home you are selling as your personal and primary residence for at least two years within five years leading up to the date of the sale. Some qualifiers determine if the home is your main home, including:
- You spend the majority of your residential time at the home (thus excludes a vacation home or rental property)
- The property is near your work or close to your bank
- The address is listed on your driver’s license, voter registration card, and other significant documents
You can independently fulfill the IRS ownership test and the user test within any two years within the five years. However, both test qualifiers must be met by homeowners during those five years. Essentially, before the date of sale of your home or the closing date.
During these five years, if you sell a property that receives the capital gain tax exclusion, you won’t be eligible for another exemption recurring simultaneously. No matter your situation, we buy houses in Texas homeowners can sell quickly and make cash offers on your property!
For married couples filing jointly when selling the house as a couple, only the head of household claims ownership of the property for both parties to pass the ownership test. A married filing test requires both homeowners to have used the property for two years out of the five to qualify.
Sometimes life gets complicated, and you don’t fully qualify for the personal residence exemption. If you cannot pass both IRS federal tax tests, you could apply for a partial exclusion provided you meet the criteria.
A few valid exemptions include having to move because of your health or relating to work, as well as any unexpected circumstances (such as home improvements). For example, let’s say you resided in the home for one year out of the last five. The minimum is two years. Yet, with your approval of exemption, you qualify for $125,000 of capital gains tax exclusions if filing alone, or $250,000 if filing jointly with the IRS.
Other Qualified Exemptions
Several other factors will help you qualify for the personal residence exemption, including active duty, disability, or divorce (for single filers).
If either or both individuals that are selling the property are active in uniformed services, foreign services, or intelligence communities, the five-year use and ownership test period can be suspended for up to ten years. To qualify for this exemption, the individuals must be stationed at least 50 miles from their primary residence or stay for 90 days or more under government orders in sanctioned housing.
The disability exemption simply states that if you become hindered physically or mentally and are unable to care for yourself in that you cannot reside on the property, you are allowed to count the time spent in a licensed health and care facility towards the two-year requirement.
For widowed spouses, they can count the time that their spouse lived in the home as part of the required two-year time span. Divorcees can also count the time their spouse owned the property in conjunction with them to qualify for the ownership test, yet they alone will be required to meet the use test.
Net Capital Gains
When it comes to navigating the tax code, determining a profit involves calculations that typically encompass the net cost and net gain. The former will vary depending on the fair market value of the asset and factors directly into what the result will be. That’s due to the net gain being the sale price taken from the net cost.
If you end up with a net capital gain, you may get a lower tax rate applied to said gain rather than the normal tax rate that applies to your standard income. Your net capital gain for the year should be more than your net short-term capital loss. You can calculate this using a capital gains calculator.
Net capital gains are most commonly calculated based on the adjusted basis in an asset, which is the amount you paid to acquire the said asset, minus depreciated and any costs you incurred during the sale.
Selling property as a taxpayer doesn’t have to be complicated, especially when attempting to calculate your capital gains tax on home sales in Houston. While there are ways to reduce those amounts, including holding onto your asset for longer than a year to benefit from special long-term tax rates, you also can meet certain eligibility requirements for a personal residence exemption.
Despite your knowledge of capital gains taxes and what your investment property is or isn’t worth, we always have a professional realtor on hand to help cash home buyers in Arlington, Houston, and Dallas can trust to deliver. Reach out to an expert real estate agent to find out more.