Are you wondering about your tax obligations after you sell your Wisconsin home?
Selling a home in Wisconsin can have big tax implications. In fact, it may even be factor in your decision to sell your property at all. Selling your home now or in 2 years can dramatically change your post-sale tax obligations, as you’ll see below.
It’s important to know that you don’t pay taxes immediately upon sale, but rather in April of the year after you sold your property. Budget wisely so you don’t spend all your proceeds and find yourself unable to pay the tax debt.
This blog tackles a few tax tips regarding selling your Wisconsin property, including the “Capital Gains Tax Exemption”, reporting issues, the first-time homebuyer credit, and selling cost deductions. For specific questions, we recommend you consult with a qualified accountant or the state/federal taxing agencies.
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Capital Gains Tax Exemption
When selling your house in Wisconsin, not all profits are taxable. As long as certain conditions are met, you can exclude a high portion of your profits. Typically, you will be able to exclude $250,000 from your tax return, and up to $500,000 if filing a joint return. (However, if you sell for a loss, you won’t be able to take a deduction for that amount.)
The deduction is only available when selling your primary residence, and can only be used once every two years. To qualify for the deduction, you must have lived in the residence for at least two of the past five years.
Here are some guidelines from the Wisconsin Department of Revenue:
If you meet the ownership and use tests, the sale of your home qualifies for exclusion of $250,000 gain ($500,000 if married filing a joint return). This exclusion applies if during the 5-year period ending on the date of the sale, you:
Owned the home for at least 2 years (the ownership test), and lived in the home as your main home for at least 2 years (the use test).
If you do not meet the requirements above, you might still be able to exclude a portion of your profits from your income tax. There are many special conditions you can meet in order to receive a prorated, tax-free gain. If you need to sell because of a change in your health, a job change or other unforeseen circumstances, you will be able to write-off a portion of the profit.
Reporting the Sale For Your Wisconsin Property
You will need to report the sale if you receive a 1099-S form from the closing agent. Form 1099-S is used to report gross proceeds from the sale or exchange of real estate and certain royalty payments. A 1099-S form must be provided to the recipient and a copy mailed or e-filed to the IRS.
This form provides the IRS with information regarding the proceeds from real estate transactions. To avoid reporting, make sure that you are able to exclude all profits. Let the agent know at the time of closing that the form will not need to be issued. Even if you are able to deduct all profits, if the form is issued, you will still need to file it with the IRS… even if no money is owed.
Check out the Form 1099-S here.
Capital Gains Tax
If you are selling an investment property or house you have only owned briefly, you will likely be subject to the capital gains tax.
A capital gains tax is a type of tax levied on capital gains, profits an investor realizes when he sells a capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor.
Capital Gains taxes are dependent on how much you make. If you have a lower income, you will pay no capital gains taxes. People in higher tax brackets can pay upwards of 20%. Short-term assets are typically taxed the same as ordinary income.
First-Time Homebuyer Credit
Depending on the date you bought and sold your Wisconsin house, you might have to pay back all or part of the credit you received.
Typically if you move within 36 months of purchasing the home, the credit must be paid back upon the sale of the home.
According to the IRS “The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.”
Special rules apply and can be found in Publication 523 from the IRS.
Deduct Selling Costs
Almost every home sale will incur sale costs. When selling your Wisconsin home, you may be able to deduct any reasonable cost.
This includes the closing costs, improvements made in order to sell the house, assessments, marketing costs, agent fees and so on. Keep track of every cent you spend in an effort to sell your home. Come tax time, this can amount to major deductions!
No matter what time of the year you sell, it is always important to seek the counsel of professionals. Consult your agent, accountant, and attorney to make sure you have set up the best terms for yourself.
Finally, don’t stress too much about taxes when putting your house up for sale in Wisconsin. Odds are Uncle Sam won’t be getting his hands on your profits.