If you are thinking about selling your Dallas home you probably asked the question – “Do You Have to Pay Taxes When You Sell a House In Dallas?”
Like most people, you want to sell your home for the most money possible. If you have been following the Dallas-Fort Worth housing market and know what your home is valued at, you can still wind up losing money if you don’t understand tax rules when selling your Dallas home.
We discuss how to avoid paying taxes, including capital gains tax, when you sell your Dallas-Fort Worth home and whether you qualify for any other benefits to maximize your profits.
What is Capital Gains Tax and Why Does it Matter for Real Estate
When we talk about tax exemptions or paying taxes on home sale profits, we’re mainly talking about capital gains tax. This is a tax levied on the difference between the sale price of your home and the original purchase price.
Depending on your tax bracket, capital gains tax rates range from 0 to 20 percent. Short-term capital gains tax refers to assets that were only held for a year or less, which is then taxed out of your ordinary income.
Home sellers in Dallas who don’t want to pay capital gains tax can sell their home and take home all the profits if they meet certain requirements according to tax laws.
Do You Have to Pay Taxes After Selling Your Dallas Home
In most cases, you will be exempt from paying taxes on a home you bought, paid for, and lived in for a few years. Most home sellers do not even need to report a home sale to the IRS.
However, the most accurate answer comes down to how long you owned the home and whether you lived in the property before you sold it, as well as how much profit you made from the sale.
This rule is based on the Tax Relief Act of 1997, which stipulates as follows:
- If you bought and lived in the property for two of the five years before you decided to sell, then up to $250,000 of that profit is tax-exempt, meaning you don’t have to pay taxes.
- For married couples filing a joint return, the tax-exempt amount increases to $500,000.
There are some further rules to this law, however.
- While the law exempts you from this profit for taxable income, you can’t take a deduction if you sold your home at a loss.
- It’s possible to use this exclusion any time that you sell a primary residence, so long as it was yours and you lived in it for 2 out of 5 years before the sale.
- You can’t use the exclusion on another home if you previously used the exclusion in the past 2 years.
- If your profit exceeds $250,000 as a single filer or $500,000 as a married couple, then the excess must be reported as a capital gain via a Schedule D on your taxes.
How to Qualify for Tax Breaks on Home Sales in Dallas
There are three qualifications that you must meet to get out of paying capital gains tax from the sale of your home.
- Home Ownership – The tax law stipulates that you must have owned the property for at least 2 years within the 5 years leading up to the sale date. The time doesn’t have to be continuous, so if you owned the house for 7 years and then rent it out for 3 years prior to the sale, then you should still qualify for the tax exemption.
- Primary Residence – It’s also not enough that you owned the home. You must have spent time in the home as your primary residence for at least 2 of the 5 years before the home is sold. This means that if you can’t prove you lived a full 730 days in the home, then you may not be exempt from capital gains tax.
- Benefit Unused Past 2 Years – The tax exemption can’t be used if you have used it within the previous 2 years for another property. If you have excluded the capital gain on a sale of a home within 2 years of the sale, then you will have to pay capital gains tax on your new home.
Married couples also have a few more qualifications.
- You must have filed a joint return together.
- One spouse must be able to meet the ownership requirement, which means that only one of you have to maintain ownership.
- Both spouses must have lived in the house for 2 out of 5 years prior to the sale date.
Selling You Primary Residence in Dallas
As you can see, your home must qualify as a primary residence. There are specific rules set by the IRS to define this type of home.
However, the same law allows you to convert an investment or rental property into a primary residence. This is because the two year residency requirement doesn’t mean you have to live in the home for two consecutive years.
This means you could potentially have lived there for one year and then returned after a hiatus to live in the residence again for another year.
Who Isn’t Exempt from Capital Gains Tax
One of the main restrictions for this tax exemption is that you aren’t trying to sell any other properties and claim a secondary capital gains tax.
The tax law states that you can only use the exemption once every two years. This means that if you owned multiple properties and lived in both, you would only be able to get an exemption on one property.
However, now you can use the proceeds from the sale anyway that you want, so long as you meet the qualifications above. If you meet these requirements, you’ll have no problem selling your home tax-free and won’t owe anything to the IRS.
Don’t Meet the Capital Gains Tax Rules?
There could still be a specialty circumstance where you don’t have to pay taxes. For example, there are different rules that let you claim either a partial or full exclusion from payment.
Here are those qualifications:
- Did you acquire the home as part of a divorce settlement? You are eligible to count the time the place was owned by your former husband or wife as the time you owned the property for passing the 2 out of 5-year rule.
- Short temporary absences still count as time lived at the residence. You are even allowed to leave the country for short periods of time and count them as time lived. It’s possible to count this time even if you rent out your property during this time.
- Even if courts stipulate in a divorce that you or your spouse can use the home during separation, the spouse who moves out can still count the time in the home as “time lived in the property”. This is important to note if one spouse moves away but continues to own part of the house until it’s sold, it still counts as time lived.
- In the case of spousal death, the surviving widow can count the period of time tha the deceased spouse lived in the home as time lived in, so long as the surviving spouse does not remarry prior to the home’s sale.
Tax Laws for Military and Government Agency Workers
There are other rules for those who have served on “qualified official extended duty” missions, so long as you served under uniformed services, Foreign service, or federal intelligence.
Qualified extended duty is defined as:
- For over 90 days or an indefinite period of time, you were at least 50 miles from your main residence, or
- If you were residing under government orders in government housing for more than 90 days.
This means that you can still meet the qualification of “time lived in” so long as you were on qualified extended duty, even if you did not technically visit or live in your home for 2 years within 5 years of the sell date.
Other Tax-Exemptions for Dalls Home Sellers: Reduced Exclusions
If you don’t pass the qualifications, you may still be able to reduce your taxes on profits from a sold home. Part of your profits may be tax-free if you meet the following conditions:
- Change of health that left you medically unable to live in your home
- Change of employment that required you to move
- Other circumstances such as a divorce or a single pregnancy that produced multiple births, requiring a larger home.
Typically, this means that if you lived in the home for ½ of the lived in time requirement, then you would have a reduced exemption according to the time lived in the home.
For example, if you are single and had to move due to a change in employment after 1 year, then you would only qualify on an exemption for $125,00 of the total $250,000 profit.
Should You Take a Tax Exemption for Selling a Dallas Home
There are some cases where it’s better to pay the tax on a home sale. For instance, what if you know that you’ll sell another home that’s likely to make an even bigger profit in the next year or so?
You wouldn’t be able to qualify for the tax exemption if you took it on a smaller sale now, so it’s best to pay taxes and save your tax exemption for the bigger profit.
Do I Have to Report the of My Dallas Home?
Only those who receive a Form 1099-S have to report the sale of a home on a tax return or if you don’t meet the requirements for excluding the capital gains tax when selling your Dallas-Fort Worth home.
A Form 1099-S may be provided from a real estate closing agent, title company, real estate broker, or other mortgage company. However, you can avoid this form if you follow these steps:
- Tell the agent in writing before February 15 of the following year that all the profits are tax-free
- Provide evidence or assure the agent that you owned and lived in the residence for two years of the five years leading up to the sale of the home.
- You haven’t sold any other properties within the past two years where you were tax-exempt
- No part of the residence was used for rental purposes or business work by you or your spouse.
- The sale price is $250,000 or less if single, or $500,000 or less if married, and you filed a joint return.
- Your spouse also used the property as a primary residence and have not sold or exchanged any property that was exempt from the tax law within the past 2 years.
Is the Sale of Your Dallas Home Tax-Exempt?
So do you have to pay taxes when you sell a house? Not if you qualify for an exemption based on your primary residence status and total cost of the sale.
Need more help selling your home fast? Call us at 214-272-2177 or fill out our quick form to get a cash offer on your Dallas house today!