Buying low and selling high is an excellent strategy for any property. While it’s rewarding to turn a big profit on your home sale, don’t forget to pay taxes.
Not everyone will owe taxes after selling their Florida home. Some exceptions will affect your tax liability. In this guide, we’ll cover everything you need to know about Florida real estate taxes, specifically after a home sale, and how to avoid them. Let’s begin!
Do You Pay Taxes When You Sell Your House?
Florida property owners must weigh the pros and cons before selling their homes. As a seller, you must pay the real estate agent commissions, attorney fees, inspections, and other costs, which eat into your profits. Additionally, you’ll report the financial transaction on your federal taxes. That’s because the sale is considered income; therefore, you’re obligated to pay capital gains tax on the earnings. This is no different than reporting lottery winnings.
Fortunately, you’re only taxed on the profits, not the purchase price. For example, if you bought your Florida property for $300,000 and sold it for $400,000, then you’d only report $100,000 in profit, and that’s what you’d be taxed on.
Does Florida Have Capital Gains Tax?
There are many advantages to living in Florida, such as no state income tax and no capital gains tax.
However, as an income tax resident in Florida, you’ll have to pay for federal capital gains when selling your property.
This tax rate depends on many factors, such as income bracket, how long you’ve lived there, how you’re filing your return, the property type, and how long you’ve lived there.
What are Capital Gains Taxes?
A capital gains tax requires you to pay taxes on the sale of your asset. The profit generated on the home sale is categorized as a capital gain and will be taxed.
There are two forms of capital gains taxes: long-term and short-term. Below we’ll discuss the differences between the two:
Long-Term Capital Gains Tax
When you sell your home after more than a year of ownership, your profits are taxed as long-term capital gains, which you’ll receive lower tax rates ranging between 0 to 20%. This varies depending on your income level:
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0% tax: Single individuals earning up to $40,000 or married couples making up to $80,000 will be eligible for a federal capital gains tax exclusion on their long-term investment.
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15% tax: A 15% long-term capital gain tax is applied when an individual makes between $40,0001 to $441,450. Or if married couples are earning between $80,001 to $496,600.
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20% tax: Individuals making over $441,450 or married partners earning $496,600 or more have 20% taxes owed on the net profit.
Short-Term Capital Gains Tax
If you hold the property for less than a year, you’re liable to pay capital gains taxes on the short-term capital gain. This ranges from 10 to 37%, depending on your household income.
Is There a Difference Between Capital Gains Taxes and Property Taxes?
Yes, a capital gains tax is different from a Florida property tax. You must pay property taxes annually as long as you own the home and it’s separate from your tax returns. With Florida property taxes, the rate is 0.83% on average, but each county sets its own rate.
The local government in Florida offers a homestead exemption that allows you to reduce property taxes if it’s your permanent primary residence. This allows up to a $50,000 exemption, meaning if your home is worth $300,000, your tax bill will be based on a $250,000 value. Make sure to consult with a tax advisor to see if you qualify.
How Do I Avoid Capital Gains Tax on a Home Sale in Florida?
Fortunately for Florida home sellers, there are many ways to avoid paying Florida capital gains taxes, regardless of your income bracket.
Take Advantage of the Section 121 Exclusion
One way to avoid paying the capital gains tax is to convert your rental property into a primary residence.
With the primary residence exemption, you must have lived in this property as your primary residence for, at minimum, two of the last five years. Using this exemption, you won’t have to pay any taxes on the first $250,000 profit from your home sale. If you’re married and have filed jointly, you’re exempt from paying taxes on the first $500,000.
Use the 1031 Exchange
A 1031 exchange helps you defer paying capital gains taxes when selling an investment property and using the profits to purchase another. However, the other piece of property must be held for investment purposes.
Also, there are some restrictions to bear in mind. After the home sale, you have 45 days to find the property and close on it in 180 days. The good news is that you can continually use 1031 exchanges for capital gains taxes deferral every time.
Offset Gains with Tax-Loss Harvesting
Tax-loss harvesting lets you offset capital gain from a property sale against losses from another. This strategy is best used when you have a property depreciating in value and another house you can sell for a gain.
In this case, you would sell the losing investment property at the same time that you sell your profitable asset. This allows you to minimize your losses by lowering the net capital gain taxed.
Sell it at the Right Time
Selling at the right time can work to either reduce or eliminate your federal capital gains taxes. For instance, in some years, you may earn more than others.
It’s best to sell a home during a year with a lower taxable income. As mentioned, the tax law doesn’t apply when you make under $40,000 as an individual or $80,000 as a married couple.
Perform Home Renovations Before Selling
Property values also play a critical role in the amount of tax owed. You avoid or reduce the tax by minimizing capital gains through a home renovation. Let’s say you’ve added $50,000 in property value with a kitchen and bathroom remodel, and you originally bought the home for $200,000.
If you sold your property for $280,000, you’d only pay capital gains taxes on $30,000 instead of $80,000 of income.
When selling property, you’ll get to mitigate your taxable value through the home renovation. Of course, consult with a tax professional before making the sale or any improvements to your home.
How the Federal Capital Gains Tax Works Based on the Type of Property
If you’re selling a home that is a primary residence, you’ll have major tax advantages. However, what if it’s an investment property or vacation home? Read on to learn how federal tax laws are different based on the property type.
Investment Property
Real estate is typically categorized as either investment or rental property, which means you use it to generate regular income.
Unfortunately, investment properties don’t qualify for capital gains exclusion. However, the 1031 exchange can allow for capital gains tax deferrals if you purchase another investment property. So although you won’t be able to exclude taxes, you can certainly reduce them or have them deferred.
Vacation Home
A vacation home is a real estate used recreationally, such as for short-term stays. Vacation homes are typically considered second homes and don’t qualify for exclusions.
Do You Have to Pay Capital Gains Taxes If You’re a Non-Resident or Foreign Investor?
It’s common for investors to want worldwide income and Florida real estate offers many attractive foreign investment opportunities.
If you’re a non-resident, you must abide by the Foreign Investment in Real Property Tax Act. This regulation requires the buyer to withhold 15% of the amount realized from the home sale. This ensures that non-residents pay the federal capital gains tax. We recommend working with a tax advisor with a lot of experience in your home country’s tax treaty to ensure you’re following federal guidelines.
Even residents who aren’t U.S. citizens can be considered U.S. income tax residents if they are in the country for 183 days or more. Therefore it’s important to know your residency status for income tax purposes.
Next Steps for Florida Residents
The process of selling your home and determining the federal capital gains tax you owe can be a major headache. While there are many ways to avoid or reduce your taxes when you sell your Florida real estate, not everyone will be able to do so.
The best thing you can do is work with a tax accountant to advise you on the best strategies to qualify for exemptions and how to report those earnings on your next return.
If you’re interested in purchasing a new Florida home or investment property in Florida, check out our website to find new real estate listings. Or read our blog for more tips on all things real estate.
