“Can My Estate Plan Solve My Capital Gain Tax Issue?” Take a listen.
The increasing real estate prices in Massachusetts is prompting many homeowners to consider selling. One common misconception is that selling and buying at the same time can help you avoid taxes. Unfortunately, that only applies to investment properties when using something called a 1031 exchange. For single family homes used as a primary residence, it doesn’t matter whether you use funds from a sale to purchase another property. Whether you pay taxes depends, instead, on several other factors. Here’s a look at tax considerations when selling a home in Massachusetts.
Actual Gains from the Sale
The equity you receive from the sale of a home is different from what is legally considered your gain. Actual gains are calculated using a different method. It is calculated as:
Net Sale Price – Adjusted Basis = Gain
Net Sale Price – This is the sale price of your home minus your selling expenses, such as broker fees, closing costs, transfer taxes, and legal fees. It does not include adjustments for things like interest and property taxes.
Adjusted Basis – The adjusted basis of your home is the original purchase price, transfer taxes, closing costs (lender fees, title insurance, etc), legal fees, brokerage fees, and capital improvements. It does not include regular home ownership expenses like property taxes, annual homeowners insurance, and regular home maintenance.
Capital Gains Exclusion
Once you calculate your actual gain, it’s time to determine how much of that is taxable. If your home was used as a primary residence and you lived in it for at least 2 of the last 5 years, then you may exclude a certain amount of those gains. Single filers may exclude up to $250,000 and married filers up to $500,000. If you are married but owned the home with someone other than your spouse, then you may exclude only $250,000 of your portion of the gain. Any remaining amount is taxable.
Short Term vs. Long-term Capital Gains
How much tax will you pay on gains from the sale of a home? It depends on how long you owned the home. If you owned it for more than one year, the capital gains tax rate applies. The federal rate for 2019 is either 0%, 15%, or 20%, depending on your income tax bracket. The Massachusetts rate is 5.1%. If you owned it for a year or less, then your regular income tax rate applies at the federal level, and the rate is 12% for Massachusetts. These rates are subject to future change.
Summary of Tax Considerations When Selling a Home in Massachusetts
Given the potentially high expense of taxes, the above tax considerations when selling a home in Massachusetts should play a role in your decision. Sometimes waiting makes sense if you are close to reaching certain thresholds. The above relate specifically to primary residences and is a broad overview of the tax rules. For your specific tax implications you will need to consult with an experienced CPA/Tax Advisor. Refer to our blog post on investment properties and primary residences converted to investment properties for additional information on those scenarios.