Capital Gains Tax When You Sell Property

If you’re selling a home, what you make could be taxable. Depending on your property's value and other factors, you might be hit with a big tax bill that you weren’t expecting.

Capital gains on real estate can be taxed, but there are things you can do to reduce or avoid what you owe to the IRS when you sell your house.

A capital gains tax is the fee you’re responsible for paying on profits you make when you sell an asset. Your capital gains taxes can apply to stocks, bonds, and tangible assets such as cars, boats, and real estate. The IRS and many states also assess the capital gains taxes on the difference between what you’re paying for your asset, known as your cost basis, and what you sell it for.

Capital Gains and Real Estate

The capital gains you might owe if you sell your home vary depending on your tax filing status and the sales price of your home. You may also be eligible for an exclusion. The IRS might allow you to exclude up to $250,000 of capital gains on the sale of real estate if you’re single and up to $500,000 on real estate if you’re married and file jointly.

If any of a certain number of factors are true, you then pay tax on the entire gain of the sale of your home.

These factors include:

• The home wasn’t your main residence
• You owned the property for fewer than two years in the five years before selling it
• Not living in the house for at least two years in the five years before you sold it
• You claimed the available exclusion on another home in the two years before selling this current home
• Buying the house through a like-kind exchange, which is a 1031 exchange in the past five years
• You have to pay expatriate tax
• If you do owe taxes on what you made from selling your home, different capital gains tax rates can apply.

Capital Gains Tax Rates

If you owned the asset for a period of less than a year, then typically, short-term capital gains tax rates apply. The rate is the same as your tax bracket. Long-term capital gains tax rates will usually apply if you have owned the asset for more than a year. A lot of people qualify for a 0% rate, but depending on your income and filing status, you might pay 15% or 20%.

Avoiding Capital Gains Taxes When Selling a Home

Some of the things you can avoid having a tax bill from selling your home include:

The best way to avoid taxes is to live there for at least two years, which don’t have to be consecutive. If you’re a house flipper, you have to be careful here. If you sell a house you didn’t lie in for at least two years, your gains can be taxed. If you sell in less than a year, it’s particularly expensive because you may have to pay the higher short-term tax rate.

Determine if you qualify for an exception. You might still be able to exclude some of the taxable gains on the sale of your home because of work, health, or an unforeseeable event.

Finally, if you make any improvements, keep your receipts. The cost basis of your home will include what you paid to buy it and the improvements you made over the years. If your cost basis is higher, you may have a lower amount of capital gains taxes to pay. Remodels, expansions, and other updates can reduce your taxes.

WRITTEN BY ASHLEY SUTPHIN

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As U.S. Home Values Hit $47 Trillion, Here's Where They've Surged the Most

Although high mortgage rates continue to keep homebuyer demand low, U.S. home values are at an all-time high.

A housing market report released Friday by real estate brokerage Redfin shows that the total worth of U.S. homes climbed to nearly $47 trillion in June. The typical home is now valued at nearly $350,000, according to another recent analysis from listing site Zillow.

Market activity is down overall, but even more so on the seller side: Both reports point to lack of supply propping up home values amid a downswing in buyer demand.

What the data says

The total value of U.S. homes climbed to $46.8 trillion in June, surpassing the previous record of $46.6 trillion from a year prior, according to Redfin. The record-breaking growth has now canceled out the $2.9 trillion decline in value that occurred from June 2022 to February 2023 as a result of rising mortgage rates.

Zillow found that the typical U.S. home price grew to $349,679 from June to July, 1.4% higher than a year ago.

Demand for homes is low right now because homeowners are locked into their current mortgage rates. Redfin says about 90% of homeowners have a rate under 6% — significantly below the current 6.96% average.

But supply is similarly low because would-be sellers have retreated from the market. The number of homes for sale declined 15% year-over-year in June, which Redfin says is the biggest drop in almost two years. This disconnect between supply and demand is what’s pushing home values higher.

“Tons of homeowners scored an incredible deal during the pandemic: a 3% mortgage rate for the remainder of their 30-year loan. Now they’re staying put because moving would mean taking on a rate that’s twice as high,” Redfin economics research lead Chen Zhao said in a news release. “This means buyers who are in the market now are duking it out for a very small pool of homes, preventing home values from plunging.”

10 cities with surging home values

Metropolitan areas in the Northeast and Midwest saw the biggest gains in home values. These are the cities where home values grew the most, according to Zillow.

• Hartford, Connecticut (5.7% increase year over year)
• Richmond, Virginia (5.4%)
• Philadelphia, Pennsylvania (5.3%)
• Miami, Florida (5.32%)
• Milwaukee, Wisconsin (5.2%)
• Cincinnati, Ohio (5%)
• Kansas City, Missouri (4.98%)
• Baltimore, Maryland (4.58%)
• Columbus, Ohio (4.15%)
• St. Louis, Missouri (4.10%)

By: Mary Ellen Cagnassola  Editor: Julia Glum

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Got Cold Feet About Homebuying? Here’s How to Cope

Buying a home is a lot like getting married: Your stomach’s all butterflies as you make the offer; then you’re over the moon once it’s accepted. Only then, as you take those slow, winding steps toward the big day (aka closing), completely different butterflies may settle in the pit of your gut: Holy crap, this is a huge commitment. Did I make the right choice? 

We understand. Suffering a case of cold feet over an impending home purchase is remarkably commonplace. And it doesn’t necessarily mean there’s anything wrong or that you shouldn’t follow through. Odds are, your mind is just reeling with a lot of “what-ifs” that can feel downright paralyzing.

Here’s how to silence those ceaseless questions so you can make this commitment with confidence.

‘What if I can’t afford my monthly payments?’

This is a concern for just about everyone—but especially among people who are buying at the top of their budget, says Sarah Jones, CEO and co-owner of Texas-based Bamboo Realty. If you’re worried about the costs of homeownership, sit down with your loan officer or a financial adviser and review the numbers.

You’ll want to calculate the total cost of owning the home—not just your mortgage payments but also taxes, utilities, homeowners insurance, and any HOA or condominium dues. Then compare that amount to your combined household income.

As a general rule of thumb, your housing costs should be no more than 28% of your gross income. But don’t panic if your ratio is a tad higher; your financial planner may be able to help you create a monthly budget that works for you.

‘What if I overpaid?’

First, consider how much competition you had from other buyers. If you were in a multiple-offer situation, you likely had to bid at, or above, listing price to nab the property.

When Jones’ buyer clients fear that they’ve overpaid, she shows them the comparable properties (which they also reviewed before making the offer). “Very rarely do I tell a client to make an offer substantially higher than what the [comparative market analysis] showed,” she says.

Moreover, if you need a home mortgage to purchase the property, your offer automatically includes an appraisal contingency. This contingency is required by your lender and involves a third-party appraiser assessing the value of the property. If the appraisal comes in lower than the purchase price, your lender will approve a loan only up to the lower amount—leaving you to decide whether you want to cover the remaining costs out of pocket or walk away from the deal.

‘What if a better property comes on the market?’

Many people experience this second-guessing when shopping during the spring home-buying season, a period when there’s more inventory on the market, says Judy Weiniger, broker associate and CEO at Weiniger Group in Warren, NJ.

It’s a valid concern, especially if you viewed only a few properties before you submitted an offer on the home. However, when Jones encounters this, she helps her clients put things into perspective.

“If they’re like most buyers, I remind them that they already looked at hundreds of homes online before they fell in love with the one that they found,” Jones says. “Buyers don’t credit themselves for the legwork they did upfront.”

Still afraid you’re going to miss out on your dream home? “Ask yourself how happy you are with the home that you’re buying on a scale of 1 to 10,” says Jones. “If it’s an 8 or higher, you’re making a good purchase. You can look for a year and never find a 10.”

‘What if home prices tank after I buy?’

This is a valid concern, given how fresh the housing crisis of 2008 still feels. And, granted, “we never know what tomorrow will bring,” Weiniger concedes. However, this is typically only an issue if you plan to own the home for one to two years, since the housing market may not have bounced back by the time you sell. But if you plan to own the property for at least five years, you’ll likely live there long enough to regain any equity that you may have lost after purchasing the home.

‘What if I underestimated how much work this house needs?’

You may have uncovered more issues during the home inspection than you predicted, particularly if you’re buying a fixer-upper. Still, that doesn’t mean you have to tackle all repairs at once. Instead, use your home inspection report to assess what areas of the house require immediate attention (and money) and what areas qualify as remodeling projects. Then, consider whether you’re up to the challenge. And bear in mind: You don’t need to tackle everything at once.

“I tell buyers take it one room at a time,” says Jones, who recommends starting with a small project (e.g., painting the master bathroom) to gain confidence and then work your way up to bigger renovations (e.g., remodeling the kitchen).

By Daniel Bortz

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Can You Use Home Equity to Buy Another Property?

When you have equity in your home, you can tap into that and, if you’re strategic, use it as a way to build long-term wealth.

There are a lot of ways you can capture equity to build wealth. For example, you can pay off higher-interest debt or make home improvements that ultimately increase the value of your house. You can start a business or you can even invest in the stock market where returns might be significantly more than the interest you pay on your loan.

Another question people commonly have is whether or not they can use their home’s equity to purchase another property, which we discuss below.

Can You Use a Home Equity Loan to Buy a House?

In short, yes. You can use a home equity loan to buy a house, but that doesn’t mean it’s always the right decision in every situation. Using home equity can be a way to buy a second home or an investment property with caveats.

A home equity loan is a second mortgage, giving you a way to access the equity you’ve built in your home. Home equity refers to the difference between what you owe and what your home is worth.

The Upsides

If you’re thinking about using your home’s equity to buy another house, there’s a distinction you need to first make. Are you buying a second home or an investment?

If you’re planning to buy an investment property, using a home equity loan can give you more liquidity and make it less expensive. Benefits of using equity to buy an investment property include:

• • You can put more toward your down payment. A home equity loan is something you receive as a lump sum payment so that cash can go directly toward a down payment. You’ll be a more competitive buyer, which is essential in the current market, and you’ll get lower interest rates and monthly payments.
• • It can be harder to finance a second property because there are more stringent down payment requirements, so a home equity loan can be a more affordable solution and also one that’s more convenient.
• • A home equity loan is secured with collateral, which is your current home. As a result, you get the benefit of lower interest rates.
• If you’re buying an investment property, using your home equity can be a good wealth-building strategy. If you’re buying a second home, you have to consider that it’s not going to bring in income like an investment. That means that you’re going to be tying your home up in a loan and then taking on another loan, so you need to be in a solid financial position to make this work.

The Downsides

The downsides of using equity to buy an investment property do exist. These include:

• • You’re swapping an asset for a debt. You’re taking the part of your home that you own, and then you’re putting it into a loan. Ultimately, no matter the specifics, you will have higher debt, so is that what you want?
• • You’re vulnerable to housing market shifts, even more so when you own two properties instead of one. You’re doubling your risk if something happens in the housing market. For example, if the value of either of your properties goes down, you might owe more on your home equity loan and your mortgage, overextending you.
• • If you were to default on your loan, you could lose both properties.
• • You might end up having three mortgages but only two homes. Most home equity loans are second mortgages, so you have to combine this with the loan you’ll need for your second home, meaning three mortgages.
• • Another downside you’ll have to weigh is the fact that interest payments on your home equity loan will probably not be tax-deductible because of 2018 changes in tax codes.

The big takeaway here is that, yes, using home equity to buy a second home is an option and sometimes a very good one. At the same time, there are risks and it’s not always the right decision, so you need to go over the details in your specific situation carefully.

WRITTEN BY ASHLEY SUTPHIN

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First-Time Homebuyer Programs to Help You Afford a Mortgage

Conventional wisdom says you need a 20% down payment to buy a house, but let’s face it: That sum can be daunting, particularly for first-time homebuyers who don’t have a pile of cash from a property they have just sold.

The good news is that the average down payment for first-time homebuyers can be as low as 3.5% depending on what type of mortgage you get or grants programs you are eligible to apply for.

Even still, coming up with a decent amount of cash when you’re first starting out can be tough. Thankfully, there are a number of first-time homebuyer programs aimed at helping you get a loan.

Don’t know where to start? No problem. To point you in the right direction, we’ve compiled a list of loan assistance programs you should check out if you qualify as a first-time homebuyer.

Who qualifies as a first-time homebuyer?

A first-time homebuyer is not just someone who’s never purchased a home before. You could qualify as a first-time homebuyer if you or your spouse haven’t owned a home in three years. The term also extends to recently divorced persons who have only owned a home jointly with a spouse.

There are some other limitations to who qualifies. You might not be eligible for one of these first-time homebuyer programs if your income exceeds a certain amount, you want to buy a more expensive property, or you plan to buy an investment or rental property.

Now that we have the fine print out of the way, let’s look into some first-time homebuyer assistance programs that might be perfect for you.

FHA loans

The Federal Housing Administration offers a program that allows first-time buyers to purchase a home with as little as 3.5% down. One caveat—and it can be a serious one—is the mortgage insurance requirement on an FHA loan.

Unlike a conventional loan, where you no longer have to pay mortgage insurance once you reach 20% equity in your home, FHA loans require you to pay mortgage insurance throughout the life of the loan at whatever the rate was when you first closed your loan, unless you refinance. Still, it’s hard to beat the low down payment for those who are short on ready cash.

VA loans

As a veteran or active service member of the United States military, you qualify for 100% financing with a VA loan, which means no down payment and no need to purchase private mortgage insurance. Most reservists, National Guard members, and spouses of military members who died while on active duty may also apply.

To qualify for a VA loan, you’ll need a certificate of eligibility and a good debt-to-income ratio, and you’ll have to meet VA and lender guidelines for credit score. Borrowers are responsible for paying a fee, but in certain situations (such as if you we disabled during your service) the fee can be waived.

USDA loans

Wait, the people who certify your beef can also help with your down payment? Yup! If you qualify for the U.S. Department of Agriculture’s Rural Development Guaranteed Housing Loan Program, you’ll receive 100% financing—no down payment necessary.

The properties must be in areas with a population below 35,000, so they are primarily rural areas, although some suburban areas could qualify.

These loans are available only to families demonstrating need—they are without current safe housing and have an adjusted income at or below the local limit. Keep in mind that the limit can be relatively high in pricey areas like California, where a $232,200 income (for a family of four) can get you a USDA loan in some counties.

National Homebuyers Fund

The National Homebuyers Fund provides down payment assistance in the form of a nonrepayable grant, for up to 5% of the loan amount. You read that right—you don’t have to pay back anything. The NHF offers two down payment assistance programs with different sets of requirements, but both are meant for low- to moderate-income earners.

The NHF Sapphire program is available in multiple states and has generous FICO score requirements (which is a good thing if you have a subpar credit score). Ask your mortgage lender if this program would be applicable to you.

Local programs

Many states and counties have a wide variety of down payment assistance programs for first-time buyers. For example, the Colorado Housing Finance Authority offers a portfolio loan that allows a consumer to pay only 3% down and has no mortgage insurance requirement. While this program is specific to Colorado, many other states have similar products.

While these programs provide only down payment assistance, David Hosterman, branch manager for Castle & Cooke Mortgage, in Denver, recommends checking with your real estate agent for assistance in getting seller concessions to help with closing costs.

“In many cases, consumers can get into a house with no money down,” he says, although he cautions that there are still out-of-pocket expenses associated with buying a property, such as an appraisal and home inspection.

Many of these local programs have specific requirements, such as for the buyer to complete a homebuying class before obtaining the grant.

To find more information about loan programs for which you are eligible, check with your lender , and visit this HUD portal or list of state programs to see what might be available in your area.

By Cathie Ericson

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Stop Believin’! 4 Housing Market Myths Hurting Today’s Buyers and Sellers

Photo-Illustration by Realtor.com; Source: Getty Images)

The housing market has been decidedly stuck of late. Sellers with low mortgage rates are holding on to their homes, leaving buyers with scant listings to choose from.

And buyers who do find a house face substantial economic challenges as median home prices and mortgage rates remain high.

With sellers and buyers at an impasse, misconceptions and outright myths are popping up on both sides about the state of the market on social channels and forums.

However, some of the supposed housing issues that are coming up time and again aren’t true. Here are the four biggest myths about the current housing market and why experts say they’re wrong.

1. The housing market is about to crash, just like in 2008

Today’s buy-sell stalemate has some would-be buyers almost hoping that we are in a bubble—that it will burst and lead to plentiful homes available at fire-sale prices.

No one can blame a buyer dealing with the double whammy of higher home prices and interest rates for hoping for a lucky break. But the reality is that the 2008 housing market collapse tripped a recession that caused record job losses. And job loss doesn’t further anyone’s financial dreams.

Even if we are in a bubble right now—and most experts say it’s hard to call it until it’s in the rearview mirror—conditions are not at all like they were in 2008.

Unlike today, there was a glut of new homes being built then, sellers were trying to attract buyers, and homebuyers could qualify for a mortgage with little to no money down.

“That access to credit included a surge in lenders offering loans to buyers with lower credit scores, or subprime borrowers,” says Chris Ragland, principal at Ragland Capital.

Easy credit might sound good in theory, but some loans were adjustable-rate mortgages with a low “introductory teaser” rate. And once the introductory rate ended and the loan adjusted to a higher rate, some buyers could no longer afford their monthly payments.

“Subprime borrowers in particular who suffered a job loss had little to no accumulated equity in their homes,” says Ragland. So when the economic downturn came, they were immediately underwater on their loans and many defaulted.

None of these conditions is true today. Today almost half of all homeowners have more than 50% equity.

“Laws were passed in 2010 to strengthen verification of a borrower’s ability to repay a loan,” says Ragland.

And the drivers of today’s home prices are entirely different.

“The 2020 to 2022 price increase was driven by an inventory shortage and unusually low interest rates,” says Bruce Ailion, attorney and Realtor® in Atlanta.

2. Owners have such good rates, they will never sell

One of the biggest complaints about today’s housing market is that there just aren’t enough homes for sale. And given the unbeatable interest rates available two years ago, when many bought or refinanced, what would make sellers budge?

“Mortgage rates were forced lower than they should have been, lower than they likely ever will be again,” says Ailion. So when you look at it from the seller’s point of view, it doesn’t make sense to give up a low long-term rate.

But in reality, there are always life events that force homeowners to sell.

People get new jobs and have to relocate. Growing families need more room or want to be in a particular school district. Retirees downsize or move to a better climate. Seniors move to be closer to family or go into assisted living. And their home will go up for sale.

3. As rates rise, home prices will drop

Many would-be homebuyers have hoped that higher interest rates would bring home prices down. But the relationship between interest rates and home prices is complex.

“Interestingly, the increase in interest rates has not resulted in a decline in prices in most markets,” says Ailion.

In fact, home prices have been all over the place this year and vary from city to city. Home prices are still being driven by inventory. And in the most popular locations, an updated home that’s move-in ready might still get multiple offers.

“Some buyers are dating the rate and marrying the house,” Ailion explains. “Today’s high interest rates can be refinanced in the future. And today’s housing prices will likely be higher when those lower interest rates return.”

4. Good-credit buyers are subsidizing buyers with bad credit

This myth blew up over a misunderstanding about government-backed Fannie Mae and Freddie Mac loans and a new fee structure.

Fannie and Freddie are government-sponsored enterprises (GSEs) on a mission to make mortgages more accessible to first-time homebuyers with lower incomes but good credit. They don’t issue loans directly but work with lenders to lower their risk by guaranteeing certain loans should the borrower default.

The organizations also purchase other lenders’ loans on the secondary market and sell them to investors as mortgage-backed securities. This frees up lenders to be able to keep lending to new borrowers.

Fannie and Freddie are essential organizations in the mortgage industry. About 70% of all mortgages are GSE-backed. So they can set requirements and establish fees.

The new fee structure eliminated upfront fees for first-time homebuyers. At the same time, it increased fees for other loans that are outside the organizations’ stated mission and borrowers who don’t need a leg up: namely, second-home loans, high-balance loans, and cash-out refinances.

It really had nothing to do with a borrower’s credit score.

“It’s a myth,” says Ailion. “Buyers with poor credit always pay a higher interest rate than buyers with good credit.”

By Sally Jones

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