According to Tennessee Housing Market data, it’s a seller’s market. The median home price is now over $350,000, which is up 17.9% since July 2021. For homeowners looking to cash-out the profit they’ve earned from an increased property value, a valid question to ask is: Will I have to pay taxes when I sell my house?
Under federal income law, a term for describing the profits made on a real estate or property deal is known as capital gain. Let’s say you purchased your home for $150,000, and the same home is now valued at $200,000. Your capital gain is $50,000 because you are selling the home for more than your original purchase price.
This sounds great in theory. But, depending on where you live, you might owe taxes on your profits.
A capital gains tax, then, is a tax payment that must be paid when a certain profit is made on a sale. Many states in the U.S. require capital gains taxes in addition to federal capital gains taxes. California and New Jersey have the highest capital gains tax rates at 13.3% and 10.75%, respectively, while states like Indiana and North Dakota have rates well below 4%.
There are eight states, however, that do not impose a capital gains tax at the state level. Tennessee is one of them, along with Alaska, Florida, Nevada, New Hampshire, South Dakotah, Texas, and Wyoming.
Tennessee & Capital Gains Taxes
Tennessee is well-known as a tax-friendly state, recently ranking as “the 5th most ‘tax-friendly’ state,” with its lack of income tax and low property taxes. Tennessee’s avoidance of a state capital gains tax adds to its tax-friendly characteristics, as well!
Avoiding Capital Gains Tax
However, there are several nuances to the capital gains tax in Tennessee. First and foremost, while Tennessee homeowners who sell their property or properties are not required to pay a state-mandated tax rate, this does not necessarily mean you will avoid paying capital gains taxes to the federal government.
A few requirements that must be met in order to avoid capital gains taxes from the IRS include:
You have lived in the home for a total of two (2) years over a five-year (5) period before the sale, and the two years need not be consecutive. (Also known as the “two out of five rule.”)
You haven’t already used the tax exclusion on another home in the past two (2) years.
Your capital gain, or profit, is $250,000 or less. Or, if you are married and selling the home jointly and your capital gain is $500,000 or less.
If you don’t qualify for the national capital gain exclusion, you will have to pay capital gains tax on your Tennessee home sale, which is calculated based on the tax percentage in your tax bracket. Plus, any capital gains taxes that you owe from your home’s sale will need to be paid at the tax deadline for that tax year.
Owning Capital Gains Tax
Once the profit threshold has been met on the sale of your property ($250,000 for individual owners, and $500,000 for joint owners) you will likely owe capital gains taxes to the government.
For example, if a single owner earns $300,000 from the sale of their home, he or she would have to pay a long-term capital gains tax on the $50,000 they earned above the IRS’s $250,000 earnings threshold.
Capital gains tax laws can either be simple or complicated, depending on your situation. Leave the details and number crunching to Rochford Law & Real Estate Title.