A Texan’s Guide to Real Estate Capital Gains Taxes
Updated: Feb 15
As Texas continues to see dramatic growth in the real estate market, should you consider selling your home?
Sure, there are currently plenty of eager buyers but is now the right time to sell? Selling your home can be complex and this guide is meant to provide a brief overview of some options. Always consult with your tax professional on what works best for your particular situation. For now, let’s weigh your options together!
Texas real estate continues to see record highs.
First things first - Are there any “loopholes” ?
Short answer: Yes! If you’ve done a little research by now, you may have heard of the “2-out-of-5-year rule” for tax purposes. What this means is, you must have lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive and you don't have to live there on the date of the sale. Because of this rule, this only applies every two years.
If you have met the two year requirement then it is important to know the exempted amounts for your appreciated value.
You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
Example- “2-out-of-5-year rule”:
The average home price in Celina, Texas is around $500,000 and real estate growth is about 35% according to realtor.com. So you sell your home with a cost-basis of $500,000 for $675,000 in November 2021. With a $175,000 gain both single and MFJ filers are exempt from capital gains taxes.
What if you haven’t been in your primary residence for two years?
This is where decisions need to be made and options are available. Below is a list of ideas for you to consider:
Show me the money! Who cares about taxes?
Sounds like a plan, let's calculate if the sale of your home is worth it! First, it should be known that even if you have not been in your primary residence for two years, the IRS allows for a prorated capital gain based on the time that you have lived in your residence. To calculate your capital gains quickly, go to NerdWallet.
Key areas to consider when taking this option:
Gains above cost basis are considered “earned income” and will be taxed as such based on your income amount.
Home improvement expenses can be added
Must be primary residence
Cannot be a home acquired in a 1031 exchange within five years
North Texas Capital Gains Example:
Transfer your personal property to LLC:
For those considering starting a business and renting the property to tenants please watch this short video to get a detailed description about the process. As more and more small businesses emerge in Texas this might be a good time to consider this route. That said, it is crucial that you do it correctly and ensure that you and your LLC (business) is protected.
Get ready to explain everything! Start with a catchy introductory sentence or two to get the ball rolling, and then begin sharing your insights with your audience.
Keep property and rent out:
If you’re not the entrepreneurial type, that’s ok! You do have the option to rent your property outright to those looking to rent. There are some liabilities to consider when taking this route so consider:
Insurance- if a tenant is injured on your property you are liable to pay for the damages through your insurance.
Upfront costs- renovations, legal fees to protect your property, renters agreements, etc.
Ongoing Expenses- depending on the tenants this could be a large or small factor in your decision. Keep in mind that although rare, you will be responsible for repairs, upkeep (mowing, HOA dues)
Reputation- this is an unfortunate category but something that may be of importance to those that happen to occupy their rental property with noisy tenants.
So you’re ready to make your next move...Now what?
As you gather this information and discuss, it is important to know what next steps look like. The process can be as simple or complex as you make it so make sure that you have the right team in place. The purchase and sale of your home can be one of the biggest investments you make. Coordinate with the appropriate professionals for help. More than likely, you’ll be glad that you did.
Nucleo Financial is a family owned small business located in a small but rapidly growing North Texas town of Celina, Texas. Our focus is serving individuals and businesses with accounting, bookkeeping, tax planning and tax preparation. We have the pleasure of helping clients ask the right questions and find the answer that is best suited to their needs. Additionally, we have strong partnerships with those in the area that are more than proficient in teaming up with you to make this process easier.
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We are thankful for our partners, be sure to let them know that Nucleo sent you!
Home Lender- The Amaya Team
Real Estate Agent - Celina, Tx- Durbin Realty Group
Insurance- Andrew Thompson- Farmers Agency
Ranch and Real Estate Agent of North Texas- Garner Realty
Financial Planner- David McEntire
Insurance- Eggar Insurance Group