What Kind of Taxes Impact a Real Estate Transaction?

The capital gains tax and property taxes both have a large impact on real estate transactions. Here’s what you need to know about them.

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When it comes to a real estate transaction, there are two major types of taxes you need to know about: the capital gains tax and property taxes. A capital gains tax is levied on the profit you receive from selling a property, while property taxes are based on the value of the property itself. 

People often assume if they’re selling their house and that house is their primary residence that they’ll have to buy a new house to avoid getting taxed, so here’s how each tax applies to a real estate transaction and how you can take advantage of them.

Regarding the capital gains tax, if you have lived in a house you’re selling for two out of the last five years, the IRS considers that house your primary residence. If you’re a single person and have a gain of up to $250,000 on your sale, that $250,000 sum is tax-free. Anything above that and you will have to pay whatever your capital gains tax rate is. If you’re married, you can keep up to $500,000 of your capital gain on the sale.

If you’re afraid of moving because of how taxes will impact you, don’t be.

When it comes to property taxes, we have many people living in our area who’ve lived in their house for a long time who don’t want to move because they don’t want to lose their low tax base.

For example, let’s say you paid $200,000 for your house and the property tax was 1% per year, which means you paid roughly $2,000 a year. If you want to sell the house now for $1.5 million and buy your next house for $1.6 million, your new property tax will be based on that $1.6 million price tag. That means you’d go from paying $2,000 a year to paying $16,000 a year.

There is a solution for this dilemma, and it’s called Proposition 60. This proposition allows you to move your tax base to another property. If you sell for $1.5 million and you buy another house of equal or less value, you can simply transfer that tax base and continue paying $2,000 a year.

The primary purpose of this proposition is to allow couples who’ve lived in their house for a long time and don’t have kids around anymore to sell that house and buy a smaller one without getting burdened with a higher property tax.

If you have any questions about these two types of taxes or are looking to buy or sell a house, don’t hesitate to reach out to me. I’d be happy to help you!

The Top 3 Reasons Why a Transaction Fails

Why do some real estate transactions fall apart? There are many factors in the real estate process, but there are three main ones that cause transactions to fail.

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Sometimes, real estate transactions can fall apart. It’s unfortunate, but it happens.

One of the biggest things you have to understand is that your agent’s job is to make the process as seamless as possible. When nothing goes wrong, that is when the agent has done their job for you. After all, the best way to prevent any obstacle is to get in front of it.

That said, there are three common reasons why real estate deals fail:

1. The home inspection. Sometimes, buyers look at the inspection and ask the seller to make thousands of repairs, which is not a good strategy. Instead, make sure that major items like the roof or HVAC system get taken care of. Smaller, cosmetic issues don’t need to be fixed by the seller.

Don’t get emotionally involved in the negotiation process.

2. Real estate agents. Too often, I see real estate agents become emotionally involved and get in the way of their clients' best interest. It’s important to hire the right agent to take care of your needs.

3. Negotiations. I have seen buyers send in lowball offers many times. If you are selling a home for $1 million and the buyer sends in an offer that’s $60,000 below market value, it’s easy to get upset. As your fiduciary, I recommend that you make a counteroffer. It’s easy to get offended and dismiss an offer, but you never know what will happen. I want to get you the highest profit so that you can get the greatest return from the value of your house. Let me be your third-party negotiator; whether you are buying or selling, don’t get emotionally involved during negotiations.

If you want to have a successful real estate transaction, it’s important to be aware of these mistakes so that you can avoid them. If you have any other questions about buying or selling a home, just give me a call or send me an email. I would be happy to help you!