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Tax Implications of Selling Your Home in Massachusetts

If you’re selling your home, you likely just want to get it over with and get started on the new chapter in your life in your new home. But inevitably no matter where you are in the world – you will have to deal with the tax man in some way, shape or form. If you made a profit on the sale of your home, you may to pay capital gains taxes. Having a very good understanding of the pertinent tax rules that you will fall under can help you minimize your tax bill for the following year’s IRS filing. So let’s take a look at the potential tax implications of selling your home in Massachusetts.

The Likelihood of Paying Taxes on the Sale of Your Home 

If you have owned your home for an extended period of time and your home has appreciated significantly, as is often the case, you’ll get a large payday when selling your home in Massachusetts. Unfortunately you will also probably owe the IRS money for the profits earned on the sale. For you, your property is a home though in the eyes of Uncle Sam it is an asset and so is subject to capital gains taxes.

The biggest question at tax time for individuals or families who have 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.

Considering the fact that home prices, across the country, rose dramatically between 2020 and 2022. And that means your home probably experienced significant appreciation and 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 can apply when selling your home

A capital gains tax is a tax placed on any profits earned when a capital asset is sold. The IRS considers almost everything you own and use for personal or investment purposes to be a capital asset. These taxes are due on the tax deadline after the asset is sold, which applies to investments like stocks, bonds, and real estate.

There are two sides to this, the IRS has two categories for capital asset gains: short-term gains and long-term gains. When it comes to selling your home, if you and your family lived there for less than two years, you will be exposed to the short-term gain rules. If you’ve lived in your home for two years or longer, the gain will be considered long-term. When you sell your home, the capital gains tax liability depends primarily on how long you’ve owned the home and your income.

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 either 0%, 15%, 20%, or 28% based on a number of factors. 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 that you may qualify for as a home seller. These exclusions can significantly reduce or even eliminate the amount of capital gains tax you owe.

Industry experts highlight that if you meet specific requirements, you can exclude up to $250,000 of the gain from the sale of your home if you are single. For those who are married and filing jointly, this exclusion can increase to $500,000.

To qualify for this exclusion, you must meet the following criteria:

  • Ownership Requirement: You must have owned the home for at least two years during the five years preceding the sale. This period does not have to be continuous. If you are married and filing jointly, only one spouse needs to meet this requirement.
  • Use Requirement: The home must have been your principal residence for at least two of the five years before the sale. In the case of married couples filing jointly, both spouses must meet this requirement.
  • Exclusion Frequency: You must not have excluded the gain from the sale of another home during the two years before the sale of the current home. If you have sold another home within this period, you must not have taken the exclusion on that sale.

Meeting these requirements can help you take advantage of the exclusion and potentially save a significant amount on capital gains taxes. It’s important to plan ahead and keep thorough records to ensure you qualify. If you think you may be eligible, consulting a tax professional or a real estate agent in Massachusetts can provide further guidance. To discover more, call (781) 258-6976.

Special Circumstances

Even if you don’t meet the primary criteria for capital gains tax exclusions on selling your home in Massachusetts, you may still qualify for full or partial exceptions under special circumstances. These exceptions can provide significant tax relief and are designed to accommodate various life events and situations, which include…

  • Gaining ownership of the home during a separation/divorce: If you acquired the home as part of a divorce settlement, you might be eligible for exceptions that reflect this change in ownership status.
  • If your spouse died during your ownership of the home: In cases where the home was jointly owned and your spouse passed away, you might qualify for certain exclusions.
  • Owning a “remainder interest” in the home when selling: If you held a remainder interest in the property, meaning you were designated to inherit it after the life tenant’s death, special rules might apply to your sale.
  • Having your previous home condemned: If your previous home was condemned and you received the current home as a replacement, you might be able to claim exclusions due to this involuntary conversion.
  • Being a service member during your ownership of the home: Active duty military personnel often have different rules applied to their housing sales, recognizing the unique nature of their service commitments and relocations.
  • Releasing the home in a “like-kind” exchange: If you exchanged the home for another property under IRS rules for a like-kind exchange, special tax treatments might apply to your situation.

These special circumstances acknowledge that life events can significantly impact homeownership and the ability to meet standard criteria for tax exclusions. Consulting with a tax professional can help you understand how these exceptions might apply to your specific situation and ensure you maximize your tax benefits when selling your home.

Calculating Capital Gains Tax

If you are planning to sell your home and want to estimate your potential capital gains tax, the first step is to determine the cost basis of your property. The cost basis is essentially what you invested in the property, including the purchase price and any capital improvements made over the years.

For example, if you bought your home for $300,000 and later spent $50,000 on renovations, your cost basis would be $350,000.

When calculating your capital gains, start with the sale price of your home and subtract any expenses incurred during the sale, such as closing costs, real estate agent commissions, and any legal fees. These costs reduce your overall profit and thereby lower the taxable amount.

Next, subtract your cost basis from the adjusted sale price. The resulting figure is your capital gain, which is potentially subject to capital gains tax. This gain is what you report on your tax return and is the amount that may be taxed by the IRS.

Understanding these calculations can help you plan better and possibly take steps to reduce your tax liability, such as keeping detailed records of all home improvement expenses and other deductible costs.

Get Professional Assistance

If this capital gains tax business seems complex and complicated, that’s because it certainly is. So when selling your home, be sure to consult a tax professional and an experienced Massachusetts investor. We can guide you through the basics to help you arrive at the best outcome when you sell your home. So if you have concerns about the tax implications of selling your home in Massachusetts, be sure to contact us at (781) 258-6976.

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