Preface: Do you own a house whose value has increased since you bought it? If so, you might be curious about the tax consequences if you sell it. The taxes for selling a house vary depending on the scenario. This article explores some of the tax consequences when selling houses.
Tax Planning on Residential Real Estate Transactions (Segment I)
Credit: Jacob M. Dietz, CPA
Buy and Sell Same Year
Assume John Georges had some money to invest, and he purchased a house at the advice of his father. He bought a $200,000 brick rancher in June 2018. John heard real estate prices were climbing rapidly in his area, so he decided to wait for a buyer instead of renting it out.
“John therefore sold it to them at a $25,000 gain. The income would be a short-term capital gain since John owned it for less than a year”.
In August 2018, John’s realtor that helped him buy the house called him and said another buyer desperately wanted to buy the house, and they were willing to pay John’s asking price. John therefore sold it to them at a $25,000 gain. The income would be a short-term capital gain since John owned it for less than a year. Short-term capital gains are taxed at ordinary tax rates. Note that only the gain (sale price less purchase price less other adjustments such as selling costs) is taxable, not the entire sales price.
Buy and Sell plus other Goods
This scenario is the same as the first scenario, except when John sold the brick rancher, he received an additional $25,000 for items left in the house by the previous seller. These items included furniture for all the rooms. The additional 25,000 increased his income to $50,000, taxed at ordinary rates.
Buy and Sell after more than a Year
In this scenario, the facts are the same as in scenario 1 except for the sale date. John owned the house without receiving any offers for nearly a year.
“Levi explained to John the difference between short-term and long-term capital gains. If John sells a house he owned for a year or less, it is a short-term capital gain”.
Shortly before a year ended, a realtor contacted John with an offer. John was pleased with the price, but he called his accountant, Levi, before deciding. Levi explained to John the difference between short-term and long-term capital gains. If John sells a house he owned for a year or less, it is a short-term capital gain. Levi explained that short-term capital gains are taxed at ordinary rates. On the other hand, houses owned over a year receive long-term capital gain treatment.
“Levi recommended that John go ahead and accept the offer, which would bring John a $25,000 profit, but Levi also advised that John wait to settle on the house until more than a year after the purchase date”.
The tax rate varies for long-term capital gains, but it is lower than ordinary income tax rates. Levi recommended that John go ahead and accept the offer, which would bring John a $25,000 profit, but Levi also advised that John wait to settle on the house until more than a year after the purchase date. By waiting a few weeks to close, John benefitted from the lower long-term capital gain rates.
Conclusion of Segment I.