If you’re hesitant about selling your home because you’re not sure of the effects it will have on your financial situation, then this article is for you. Outlined below are three of the most important things you need to know about and consider before deciding to sell your home.

What Are Capital Gains and How Do They Apply to Home Sales? 

The IRS and many states have capital gains taxes on the difference between what an asset costs you and how much you sold it for. Capital gains taxes apply to real estate and investments such as stocks, bonds, and even other assets such as cars and boats.

Usually, the IRS will allow you to exclude some of the capital gains from getting taxed. For example, you get $250,000 free of tax if you’re single and $500,000 free of tax when you are married.

However, there are cases where the exclusions do not apply, and you have to pay a tax on the whole capital gain, which happens if any of the below factors apply to you as a homeowner: 

  • You owned the home for less than two years, and it wasn’t your principal residence.
  • You have already claimed the exclusion on selling another home in the last two years.
  • You got the house through a like-kind exchange in the past five years.
  • You’re subject to expatriate tax. 
  • You didn’t live in the home for at least two years before selling it. 

Effects of Inflation

Housing is considered to be a great asset in times of inflation. That’s because its value will increase over time, and it’s also a leveraged asset. So if you have an interest rate that doesn’t change, you might not have to pay more for your home, but its value will increase in that same period. 

However, you must consider how supply and demand play into this scenario. If there’s an oversupply of houses on the market, even the high inflation won’t stop housing prices from going down. Along with that, if mortgage rates are too high, people are likely not going to take home loans, which will also decrease the demand and lower the prices of houses. 

That’s why, when considering when to sell your house, you have to time the market as well as you possibly can. The presence of inflation may indicate that it’s a good time to sell your home, as you may be able to make a profit. However, that’s only true if there’s also a demand for housing at that same period. 

Housing Tax Exemptions

Property taxes apply to every individual that owns real estate in the United States. Those taxes are generally based on the value of your property and can change from year to year, as the value of your home also fluctuates. However, there are ways to avoid paying those taxes, which we will discuss below. 

There are a few situations where individuals may qualify for property tax exemptions: 

  • Homestead exemptions: If a house is a primary place where you live, you can safeguard a portion of its value from getting taxed. 
  • Senior exemptions: Most states have tax exemptions for individuals once they reach a certain age. 
  • Exemptions for People with Disabilities: This policy varies from state to state, but individuals with disabilities are typically eligible to receive tax relief for a property they own.
  • Exemptions for Veterans: Active members of the military and veterans are also able to receive property tax relief based on the state they live in. 
  • Income-based Exemptions: Some states offer tax relief for low-income individuals and families.

If you think you may qualify for a tax exemption in your state, then make sure to check your eligibility and submit your documents on time. It will save you some hard-earned dollars in the future. 

Final Thoughts

It’s essential to consider how selling your home will affect your future. Will you look for a new home to buy, or will you begin renting? Are you using gains from the sale to purchase another home? How will the capital gains taxes and new property taxes affect your selling and buying strategy? These are questions that should be discussed with your realtor and your financial advisor.