Buying or selling a home can be stressful. For most people, a home purchase or sale is the biggest financial transaction they’ll complete in their lifetimes. It’s not surprising that some people feel overwhelmed and confused about the process.
At CMP, a question that people frequently ask us is:
Do I pay taxes when selling a house?
That’s an important question to ask, and so is its companion question:
What is the tax on buying a house?
Both types of transactions have significant tax implications, and this post will explain what you need to know about them, including information about tax liens, capital gains tax, and more.
When buying your first home, there are certain advantages to you that you may not be familiar with when it comes to buying instead of renting. Those advantages will be further discussed in the next section, but we’ll talk about the amounts you can’t deduct when you purchase a house. You may not deduct:
Another thing to keep in mind is that you may be able to take an early withdrawal from your retirement plan to put toward your down payment. If you are under the age of 59 ½ and a first-time home buyer, you can withdraw up to $10,000 without paying the early withdrawal penalty. This rule applies only to traditional IRAs, not Roth IRAs or 401k accounts.
You may deduct certain items on your taxes when you buy a new home. The 2017 Tax Cuts and Jobs Act (TCJA) updated and changed some of these items, and this act will affect Utah home buyers.
Let’s start with the first tax deduction you can receive, your mortgage interest. There are many misconceptions about how much interest you can deduct and how big a tax break you are likely to receive. The TCJA increased the standard deductions as follows:
These new amounts are important because if your total deductions add up to less than the standard amount, you may not itemize deductions. That means you will not get a tax advantage from deducting your mortgage.
However, if your deductions are higher than the standard deduction, you can and should deduct your mortgage interest on indebtedness up to $750,000 if married filing jointly, or $375,000 if married filing separately. This number applies to homes acquired after 2017 because this was the year TCJA was enacted. For homes acquired previously, the limits are $1,000,000 and $500,000, respectively.
The second major deduction is for your property taxes. The property tax is a tax in buying a house that you will be responsible for. The IRS says that “any state or local taxes based on the value of the real property and levied for the general public welfare” are tax deductible on your federal income tax. The rule does not apply to local fees that directly increase the value of your property.
Overall, the state of Utah has a property tax of 1.243%, but this can vary depending on where in Utah you are planning on buying a house. So when it comes to being able to deduct your property taxes, if you own a residential home that is you primary residence in Utah, you may exempt 45% of the home’s value from property taxes. In other words, if you had a 500,000 home, you could expect $225,000 of the value from your taxes. You would pay property taxes on the remaining $275,000 value.
When selling a house, the most important tax implication you need to be aware of is capital gains. This is a tax on selling a house that is assigned, depending on how much the house is selling for and what type of owner you are. More on this will be discussed in the next section. But for now, let’s review some significant tax questions you need to answer when selling a home. As was mentioned previously:
You should consult with a professional accountant if you have questions about which expenses are deductible.
The capital gains tax (CGT) is a tax on profits you’ve received from selling an asset that you purchased at a lower cost. This is an important tax to know of because it can apply to some house sales.
When it comes to the CGT, there are many qualifications and exemptions you should know about because it may or may not apply to you if you are selling a house:
In Utah, you may be able to deduct capital gains tax if:
If you do have to pay the CGT, plan on scheduling a consultation with your tax professional before filing. They can help you itemize all the qualified costs associated with buying and owning the property, which you will then be able to subtract from what you owe.
With the above specifications, it is more than likely that you will not have to pay the capital gains tax in Utah. It is important to keep a close eye on the selling process of your home because that is the only way that you will know for sure if you will have to pay this tax or not.
Owning multiple properties in Utah may lead to tax deductions or more specific taxes that need to be paid at the time of purchase and/or selling. Before considering the purchase of another property, make sure that you get in contact with a financial advisor to discuss the tax implications in the state of Utah.
If you own multiple properties, you may deduct interest if you spend some time there. For example, an investment or rental property’s mortgage interest is deductible only if you live in the home for a specified period.
As of this writing, you must live in an investment property for 14 days more than 10% of the days it was rented. That means that if you had a vacation home that you rented 100 days per year, you could take the deduction provided you spent 24 days a year there.
Be sure to check out your blog post: Simplifying Tax on Rental Income.
There was a lot of information presented to you in the blog post – all about taxes on buying a house, taxes on selling a house, capital gains, and tax-deductible items. If any of this information leads to questions, contact our Salt Lake City accounting firm. We also have offices in Logan and St. George, and we’re here to help.