What you need to know: Tax Penalty for Selling a House in Phoenix
Real Estate is many times seen as a positive speculation opportunity. You can buy a property, revamp it or leave it for all intents and purposes, and sell it for a profit when everything looks good. It’s not difficult to accept that all cash you make in the deal is all yours, yet that probably won’t be the situation. There can be a tax penalty for selling a house in Phoenix before 2 years, which you can dive more deeply into below.
What Is Capital Gains Tax?
Whenever you sell your home, you may be considering moving into another one and perhaps creating a profit from the offer of your ongoing home. What you may not be thinking about is the taxes you could owe once your sale has been finalized.
Your house is a capital resource, and that implies it’s subject to capital gains tax, a U.S. federal tax policy. Contingent upon your tax filing status, lifestyle, and home deal value, you might have to pay the tax on the profit you made, which can depend on 20%.
What Happens If You’re Selling a House in Phoenix Before Two Years?
There is a significant tax penalty for selling a house in Phoenix that you’ve owned for less than 2 years as you will have to pay capital gains taxes on any profits from the sale of the property, even if it was your primary residence. Here are the implications if you sell your home too soon.
If you find yourself in a situation where you need to sell before two years of ownership, there are some important factors of selling your home that you should be aware of before selling. There are several reasons to try to avoid selling too soon if you are able. Obviously, you can legally sell your home at any time you want because the property belongs to you. However, selling a home before you have owned it for 2 years is not advisable if you have a choice. The main reason for this is that, unless your property has somehow appreciated in value very quickly, you probably don’t have enough equity to cover the costs of selling the home within such a short amount of time after buying.
The IRS has a rundown of measures that frames when you should pay the charge on all benefits related to your property deal, including when:
- You owned the property for less than two years in the five years before selling it
- It wasn’t your principal residence
- You didn’t live in the house for two years in the five years before selling it
- You claimed an exclusion on another home two years before selling this one
- You bought the house in a 1031 exchange
- You have to pay expatriate tax
How to Avoid Capital Gains Tax on Home Sale in Arizona?
Assuming that you are selling a house in Phoenix in under two years of ownership, it might be impossible to try not to escape capital gains.
When you sell your home, the IRS allows one major form of capital gains break. It’s called the home sale exclusion, and it allows you to deduct a significant amount of the profit from your home sale to minimize or avoid capital gains taxes. If you’re selling an investment property, you can use the process known as a “like-kind” exchange to lower your tax burden, but this process only applies to investment and rental properties. Here’s what you need to know.
What is the Tax Penalty for Selling a House in Phoenix Before Two Years?
You might have resigned yourself to the fact that you’ll need to pay a tax penalty, however, it tends to merit realizing what that penalty is so you can plan for it. One of two expense rates might apply, short-term capital gains tax or long-term capital gains tax.
A short-term rate might apply if you have owned your home for under a year, and it’s typically equivalent to your standard personal tax rate. If you owned your property for over a year before selling, you could qualify for a zero percent tax rate, or it might be as much as 15%, depending on your income.
Conclusion
In conclusion, understanding the tax implications of selling a house in Phoenix, especially before the two-year mark, is crucial. By being aware of capital gains taxes, the two-year rule, and potential penalties, you can make informed decisions and plan accordingly. Consulting with a tax professional can provide personalized advice and help you navigate these complexities effectively.
Tax penalties may apply when selling a house before two years. Contact OAK Street Properties to learn more about buying and selling in Arizona and what you can expect from the process.