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Tax Implications of Selling Your Home in Houston

If you’re selling your home, you’re likely eager to move forward and start the next chapter of your life in your new place. However, before you make a permanent, it’s essential to consider a crucial financial aspect: taxes. If you made a profit on the sale of your home, you might be subject to capital gains taxes. Understanding the relevant tax rules and strategies can make a significant difference, potentially saving you thousands of dollars. By familiarizing yourself with these regulations, you can minimize your tax liability and ensure you’re not leaving money on the table. Let’s dive into the tax implications of selling your home and how you can prepare for this important financial step in Houston.

The Likelihood of Paying Taxes on the Sale of Your Home 

If your property in Houston has experienced substantial appreciation, as is often the case, you stand to gain a significant profit when selling. However, it’s crucial to understand that you may also have to pay capital gains taxes to the IRS on the profits earned from the sale. Your home, being a valuable asset, is subject to capital gains tax implications.

One of the primary concerns for individuals who have recently sold a property during tax season is the potential liability for federal capital gains taxes on the sale proceeds. Essentially, capital gains denote the financial growth realized from the sale of capital assets, which includes properties such as homes, vehicles, investments, and other high-value assets.

Given the notable surge in home values observed between 2020 and 2022, indicating a probable escalation in your property’s capital gains, it is highly probable that you will need to address tax obligations when selling your home.

How Capital Gains Taxes Work

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.”

How to Avoid Capital Gains Tax

When selling your home in Houston, you may be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller.

The industry expert consensus is that if you meet certain requirements, you can exclude $250,000 from the sale of your home. This exclusion increases to $500,000 if you’re married and filing jointly.

For such an exclusion, you’ll have to meet these qualifying criteria . . . 

  • “You must have owned the home for at least two years within the five years leading up to the sale. These two years do not need to be consecutive. If you’re married and filing jointly, it’s sufficient for just one spouse to meet this ownership requirement..”
  • The home was your principal residence for a minimum of two of the five years leading up to the sale. For married couples filing jointly, both spouses must meet this requirement.
  • “You haven’t sold another home during the two years immediately 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 an experienced Houston agent. To discover more, call 713-379-4376.

Special Circumstances

Even if you don’t meet the criteria outlined above, there is still a possibility of claiming a full or partial exception when selling your home in Houston. Special qualifying circumstances in this area include…

  • Gaining ownership of the home during a separation/divorce
  • If your spouse past away during the time you owned the home
  • Owning a “remainder interest” in the property when selling
  • Having your previously-owned home condemned
  • Being a service member of the armed forces during your ownership of the home
  • Releasing the property in a “like-kind” exchange

Calculating Capital Gains Tax

If you want to calculate your probable capital gains tax on selling your home, you will need to determine the cost basis for the home.

The cost basis includes your total purchase price to buy the home, as well as any additional money spent on improvements over the years. “For instance, if you purchased a home for $300,000 and spent $60,000 on home improvements, your cost basis is $360,000.”

“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.” This will yield the amount subject to capital gains tax.

Get Professional Assistance

If navigating the complex world of capital gains tax feels overwhelming, you’re not alone. Selling your home involves complex tax considerations, making it essential to seek advice from a seasoned tax professional and a knowledgeable Houston real estate expert like us at Hero Homebuyers. We will walk you through the fundamentals to ensure the optimal outcome when selling your home. For any questions regarding the tax implications of selling your property in Houston, feel free to reach out to us at 713-379-4376.

Fred Paskell

Fred A. Paskell has served the Houston community for almost 20 years, providing real estate solutions and learning from some of the very best in the business. A native Texan and Army Combat Veteran, Paskell began his career in the commercial real estate sector and has since evolved into a subject matter expert in many aspects of both commercial and residential real estate, including valuation and investment analysis. Throughout his career he has worked for several notable and respected firms including Cushman & Wakefield, CBRE, Mohr Partners and the Newmark Group. On the commercial side, Paskell focuses on Office, Industrial and Retail assets while being purely focused on the investment side of residential real estate. While beginning his college studies at Louisiana State University (and still a big LSU football fan), he earned both his M.B.A. in Real Estate Finance and B.B.A. in Marketing from the University of Houston, cum laude, with honors. Paskell is also a CCIM designee, the pinnacle designation for commercial investment real estate. Fred devoted ten years of his life to protecting our country in the U.S. Army, including two combat tours to Iraq with the 7th Squadron, 6th Cavalry Regiment as an AH-64 Apache Helicopter Crew-chief, completing his service at the rank of Staff Sergeant. He is also an avid scuba diver of over 26 years having reached the levels of divemaster, rescue diver and technical diver. With this passion he enjoys scuba diving and spearfishing on the offshore oil platforms in the Gulf of Mexico in his spare time as well as fishing, playing poker, staying healthy and spending time with friends and family . Paskell also volunteers for several groups serving disabled veterans, including being a member of the Armed Forces Appreciation Committee at the Houston Livestock Show and Rodeo.

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