It’s almost that time of year… yes, tax season is almost upon us! If you are selling a house in Philadelphia, you will love these tax tips for selling your home! This article is for informational purposes only!
For specific questions, contact a trusted tax professional, or the IRS!
Not All Real Estate Profits Are Taxable…Know The Facts!
You will be able to exclude a high portion of your profits so long as certain conditions are met. Typically, you will be able to exclude $250,000 from your tax return, and up to $500,000 if filing a joint return. (However, if you sell for a loss, you won’t be able to take a deduction for that amount.)
The deduction is only available when selling your primary residence, and can only be used once every two years. To qualify for the deduction, you must have lived in the residence for at least two of the past five years.
It is important that whenever you move, your address is updated with the IRS.
Other Tax Exclusions That You Can Take Advantage Of
If you do not meet the requirements above, you might still be able to exclude a portion of your profits from your income tax. There are many special conditions you can meet in order to receive a prorated, tax-free gain. If you need to sell because of a change in your health, a job change or other unforeseen circumstances, you will be able to write-off a portion of the profit.
Reporting the Sale With A 1099 Form
You will need to report the sale if you receive a 1099-S form from the closing agent. This form provides the IRS with information regarding the proceeds from real estate transactions. To avoid reporting, make sure that you are able to exclude all profits. Let the agent know at the time of closing that the form will not need to be issued. Even if you are able to deduct all profits, if the form is issued, you will still need to file it with the IRS… even if no money is owed.
Capital Gains Taxes And How They Impact Your Profit
If you are selling an investment property or house you have only owned briefly, you will likely be subject to the capital gains tax. Capital Gains taxes are dependent on how much you make. If you have a lower income, you will pay no capital gains taxes. People in higher tax brackets can pay upwards of 20%. Short-term assets are typically taxed the same as ordinary income.
First-Time Homebuyer Credit Programs
Depending on the dates you bought and sold, you might have to pay back all or part of the credit you received. Typically if you move within 36 months of purchasing the home, the credit must be paid back upon the sale of the home. Special rules apply and can be found in Publication 523 from the IRS.
Deduct Selling Costs And Factoring In Commissions
When selling your Philadelphia house, you will be able to deduct any reasonable cost when selling your home. This includes the closing costs, improvements made in order to sell the house, assessments, marketing costs, agent fees and so on. Keep track of every cent you spend in an effort to sell your home. Come tax time, this can amount to major deductions!
No matter what time of the year you sell, it is always important to seek the counsel of professionals. Consult your agent, accountant, and possibly even an attorney to make sure you have set up the best terms for yourself.
Using 1031 Exchanges To Avoid Paying Taxes
If you use a 1031 exchange and buy another property with the profits from the sale of your existing property then you are able to avoid paying taxes on the sale altogether. This is a common tactic employed by real estate investors to keep rolling their profits into the next deal and snowballing them up over time.
You can really build up a nice nest egg using this approach, and it’s definitely one that we recommend trying even if you are just an average homeowner looking to make a little bit of extra side income by investing into another home and then doing the 1031 exchange as mentioned here.
Heck, we might even be able to help you locate an investment property to use the 1031 exchange on so please get in touch with us either way via call or text at (215) 882-9828 to discuss some options.
Don’t stress too much about taxes when putting your house up for sale in Philadelphia. Odds are Uncle Sam won’t be getting his hands on your profits.