Selling your home is often a major step toward a fresh start and greater financial flexibility. But before you finalize the sale, it’s important to be aware of how taxes might impact the money you walk away with. If you’ve earned a profit on the sale, capital gains taxes could take a sizable portion of your earnings. Understanding how these taxes work can make a big difference in how much of your profit you actually keep. In this article, we’ll break down what homeowners in Lubbock, Texas should know about the tax implications of selling their property.
The Likelihood of Paying Taxes on the Sale of Your Home
In the current real estate landscape, many properties in Lubbock, Texas have seen impressive increases in value over the past few years. For homeowners, this can translate into a sizable profit when it’s time to sell—potentially providing a meaningful boost to your financial future. However, it’s important to remember that with profit comes responsibility, particularly when it comes to taxes.
Because your home is considered a capital asset, any profit you earn from its sale may be subject to capital gains taxes. These taxes can reduce the net amount you keep from the sale, impacting your plans for financial freedom or reinvestment. Understanding how these taxes work before you sell can help you better plan for your financial goals.
One of the most common questions homeowners ask during tax season is whether they’ll owe federal capital gains taxes after selling their home. In simple terms, capital gains refer to the profit you make from selling high-value assets such as real estate, vehicles, stocks, or other investments. If your home has increased in value since you purchased it, the difference between your original purchase price (plus any qualifying improvements) and your sale price is considered a capital gain.
Between 2020 and 2022, home prices in many markets—including Lubbock, Texas—climbed rapidly, which means your property may have gained considerable value. As a result, there’s a good chance you’ll need to consider the tax implications of your sale unless you meet specific IRS exemptions. Fortunately, there are strategies and exclusions that may help reduce or even eliminate your capital gains tax liability, depending on your circumstances.
Being informed ahead of time can help you protect your profits and make confident decisions about your next steps. In this post, we’ll walk you through what you need to know about capital gains taxes and how to keep more of your money when selling your home in Lubbock, Texas.
How Capital Gains Taxes Work
Now, let’s dive into how capital gains taxes work and their specific application 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, and it applies to investments like stocks, bonds, and real estate.”
The IRS categorizes capital gains into two types: short-term and long-term. For homeowners, if you’ve lived in your property for less than a year, it’s considered a short-term gain. If you’ve owned and lived in your home for a year or longer, the gain falls into the long-term category. Ultimately, “the capital gains tax 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 0%, 15%, 20%, or 28%. 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
While selling your home may subject you to capital gains taxes, there’s good news: the IRS offers valuable exclusions that many homeowners qualify for. These exemptions could save you thousands in tax obligations and help you achieve the financial freedom you’re seeking through your home sale.
According to industry experts, “[i]f you meet certain requirements, you can exclude $250,000 from the sale of your home. That number increases to $500,000 if you’re married and filing jointly.”
To qualify for such a valuable exclusion, you’ll need to meet these specific criteria…
- “You’ve owned the home for at least two years during the past five years prior to the sale (this doesn’t have to be continuous). If you’re married and filing jointly, only one spouse needs to meet this requirement.”
- The home was your principal residence for a minimum of two of the five years prior to the sale. For those married and filing jointly, both spouses must meet this requirement.
- “You haven’t sold another home during the two years before the sale, or — if you did — you didn’t take the exclusion of gain earned from it.”
If you believe you might qualify for these exclusions, consulting with a Lubbock, Texas real estate solution specialist could help you maximize your financial outcome. For personalized guidance on achieving a win-win sale, call 806-630-0875.
Special Circumstances
Even if you don’t meet the standard criteria outlined above, don’t lose hope for your financial freedom. You may still qualify for full or partial exemptions when selling your Lubbock, Texas home under these special circumstances…
- Gaining ownership of the home during a separation/divorce
- If your spouse died during your ownership of the home
- Owning a “remainder interest” in the home when selling
- Having your previous home condemned
- Being a service member during your ownership of the home
- Releasing the home in a “like-kind” exchange
Calculating Capital Gains Tax
To estimate your potential capital gains tax when selling your home, you’ll first need to determine the cost basis of your property – an important step toward understanding your true financial position.
The cost basis includes both your original purchase price and any qualifying improvements you’ve made over the years. “For instance, if you purchased a home for $300,000 and spent $50,000 on home improvements, your cost basis is $350,000.”
“From there, you can add up the purchase price of the home, minus certain fees you paid for things like closing costs and the services of a real estate agent. Then you can subtract your cost basis from any money you earned from the sale.” This calculation gives you the amount potentially subject to capital gains tax.
Get Professional Assistance
Capital gains tax regulations can be complex and overwhelming for most homeowners. At Electrum Properties, we specialize in solving real estate problems quickly and providing win-win solutions that help homeowners get their freedom back. If you’re concerned about the tax implications of selling your Lubbock, Texas home, we can help guide you through the process with our fast, cash buying approach. For a no-obligation offer on your property in any condition and personalized assistance with your sale, contact us at 806-630-0875.