When selling your home in Miami, it’s important to consider the potential tax implications that may arise. If you’ve made a profit from the sale, you could be subject to capital gains taxes. Understanding the relevant tax rules can be beneficial in minimizing your tax liability. Before diving into your new chapter in a new home, take a moment to familiarize yourself with how selling your home in Miami may impact your taxes.
The Likelihood of Paying Taxes on the Sale of Your Home
If your home has appreciated significantly, as is often the case, you’ll receive a substantial payout when selling your property in Miami. However, it’s crucial to note that you may also be liable to the IRS for taxes on the profits made from the sale. Since your home is considered an asset, it is subject to capital gains taxes.
“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.”
Consider, too, that home prices rose dramatically between 2020 and 2022. And that means your home probably experienced significant capital gains. So, yes, it’s very likely that you will have to pay taxes when you sell 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.
When you sell a capital asset, such as real estate, you may be subject to a capital gains tax. This tax is levied on the profits made from the sale. The IRS defines most assets used for personal or investment purposes as capital assets. Capital gains taxes must be paid by the tax deadline following the asset’s sale and are applicable to various investments, including real estate, stocks, and bonds.
In the realm of real estate investing, it’s crucial to understand the IRS’s classification of capital asset gains into two main categories: short-term gains and long-term gains. This differentiation becomes particularly relevant when selling a property. If the property has been owned for less than a year, any gain realized is categorized as a short-term gain. Conversely, if the property ownership exceeds one year, the gain is classified as long-term. Therefore, the calculation of the capital gains tax upon selling a property is primarily contingent on the duration of ownership and the seller’s income level.
“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, you may indeed be subject to capital gains taxes, but the IRS does allow certain exclusions you may qualify for as a home seller.
According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”
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 Miami agent. To discover more, call (386) 383-2085.
Special Circumstances
Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in Miami. The special qualifying circumstances here 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 the home, as well as any money spent on improvements over the years. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”
When investing in real estate in Miami, it’s essential to calculate your capital gains tax accurately. Start by adding the purchase price of the property and deducting fees for closing costs and real estate agent services. Next, subtract your cost basis from the sale proceeds to determine the taxable amount.
Get Professional Assistance
If navigating the intricate world of capital gains tax feels overwhelming, you’re not alone. Selling your home comes with its complexities, which is why consulting with a tax expert and a seasoned Miami investor is crucial. At Cash Home Buyer Florida, we specialize in simplifying the process and ensuring you make the most of your home sale. If you’re worried about the tax ramifications of selling property in Miami, reach out to us today at (386) 383-2085.