The Austin housing market is hot — now is the time to sell your home if you are looking to maximize a profit and invest your finances elsewhere. But before you put the “for sale” sign in your front yard, it’s important to be aware of capital gains taxes on homes in Texas.
What Are Capital Gains Taxes?
When you buy anything of value—such as stocks, cars, homes, or one-of-a-kind artwork—you might be subject to a long-term capital gains tax when it comes time to sell that high price tag item.
The Taxpayer Relief Act of 1997 protects many homeowners from having to pay up. But if your primary home drastically appreciates in value from the time you bought it to the point of resale, there’s a chance you’ll have to pay long-term capital gains taxes. As home prices continue to surge in the Austin area, your home’s increased market value could mean that a capital gains tax payment is coming your way.
What You Might Owe If You Sell
What you owe to the Internal Revenue Service (IRS) depends on what you earn from the sale, if you are filing your taxes with a partner, and your income bracket. In order for capital gain tax exemption to apply, homeowners must live in the home for at least two years and it must be considered their primary residence. Second homes or vacation homes do not apply to this exemption.
If you are single, homeowners are exempt from capital gains tax if they made less than $250,000 in value. Those who are married and file together are exempt if they made less than $500,000 on the sale of the home.
If a homeowner sells their home for over $250,000 or $500,000 over what they originally bought the home, the homeowner could be subject to the tax. The tax is only applied to the amount the home appreciated over the exemption amount. For example, if a single homeowner made $300,000 over what they originally paid, the tax would only be on the extra $50,000—not the full $300,00.
The tax rate a homeowner must pay depends on their salary. See the chart below:
Do I Have to Pay Capital Gains Taxes in Texas?
Texas does not have a unique capital gain tax because this specific tax is filed through the IRS. This means you pay capital gains taxes at the federal level, and not through state taxes. No matter where you live in the United States, you will be taxed based on the appreciated value and receive your tax rate through your income bracket.
How Can I Avoid Paying Capital Gains Tax on My House?
One way to avoid paying capital gains tax on your home sale is to not accept an offer over $250,000 (or $500,000) of what you originally paid on the home.
If you make large home improvements or added additions to the home, your cost basis will also reduce the capital gains you would potentially make on the sale.
Lastly, homeowners can reinvest their proceeds into 1031 exchanges to avoid paying taxes on the sale of their house by putting it into a similar property. A 1031 exchange allows you to defer the tax on the home through a like-for-like exchange. 1031 exchanges are commonly used for businesses, so talk to your accountant if you want to consider this option.
Get a comprehensive analysis of your home’s value in today’s market using Realty Austin’s new Market Snapshot tool.