A common question from people looking to sell a house is the capital gains tax implications of selling real estate. We’ll answer this question and cover the following in the article below. This article is for informational purposes and we suggest speaking with a qualified tax professional for advice.
If you’re interested in selling without a real estate agent and the thought of selling FSBO is too much we can help. Complete the form below to contact us or, keep reading to review our detailed guide on selling your Kentucky house without a real estate agent.
- Taxes When Selling a House in Kentucky
- What is Capital Gains Tax?
- How Capital Gains Tax Works in Kentucky
- How Do I Determine My Capital Gains Tax Rate in Kentucky?
- How to Avoid Capital Gains Tax in Kentucky
- Other Real Estate Taxes When Selling a House in Kentucky
- 3 Ways to Reduce Your Taxes When Selling Real Estate
Taxes When Selling a House in Kentucky
Selling a house is an exciting but complex process, and one important consideration for sellers is the tax implications of the sale.
In Kentucky, the tax rules for selling a house can be confusing, so it’s important to understand your obligations and options.
The most common taxes with the sale of real estate are capital gains tax and property transfer tax.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit that is made when you sell an asset that has increased in value. In real estate, it’s the tax on the difference between the purchase price and the sale price of a property.
Capital gains tax only applies when you sell the property for more than you paid for it. The tax rate on capital gains depends on several factors such as the length of time you have owned the property, your income level, and the type of property.
It’s important to note that capital gains tax is a federal tax so it applies to all states including Kentucky. However, some states may also impose their own capital gains tax on top of the federal tax.
How Capital Gains Tax Works in Kentucky
If you sell a property in Kentucky it may be subject to capital gains tax on any profit you make from the sale for both state and federal taxes.
Kentucky doesn’t make distinction between short-term or long-term profits and so all gains are treated as ordinary income at 4.5%. Ordinary income is income you earn throughout the year such as your wages from a job.
The federal capital gains tax rate depends on whether the profits are considered short term (less than 12 month holding period) or long term (12 months or more holding period) and ranges from 0% to 37%.
How Do I Determine My Capital Gains Tax Rate in Kentucky?
In Kentucky all capital gains are treated as ordinary income and taxed at 4.5%.
You need to know 4 things to calculate your federal capital gains tax which can range from 0% to 37%. Once you know each of these check the Capital Gains tables below to determine the rate the profit from the sale will be taxed at.
- Gain: Determine how much you will make off the sale. This is the difference for what you paid for the property and the selling price.
- For example, if you purchased a house for $100,000 and sold it for $150,000 your gain would be $50,000.
- Time: Determine how long you owned the property. The key milestone is whether you owned the property for more or less than 12 months and is also known as the holding period. Generally, you will pay less taxes on long-term capital gains than short-term capital gains.
- Under 12 Months = Short Term Capital Gains
- Over 12 Months = Long-Term Capital Gains
- Income: Determine which income tax bracket you fall into.
- Filing Status: Determine how you will file your taxes. Are you single, head of household, married filing jointly or married filing separately?
Short Term Capital Gains
If you owned the property for less than 12 months the gain will be taxed as ordinary Income. Ordinary income is treated like any other income such as your wages from a job and ranges from 10% to 37%
2024 Short-Term Capital Gains Tax Rates
| Capital Gain Tax Rate -> | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Single | Up to $11,600 | $11,601 to $47,150 | $47,151 to $100,525 | $100,526 to $191,950 | $191,951 to $243,725 | $243,726 to $609,350 | Over $578,125 |
| Head of household | Up to $15,700 | $15,701 to $59,850 | $59,851 to $95,350 | $95,351 to $182,100 | $182,101 to $231,250 | $231,251 to $578,100 | Over $578,100 |
| Married filing jointly | Up to $22,000 | $22,001 to $89,450 | $89,451 to $190,750 | $190,751 to $364,200 | $364,201 to $462,500 | $462,501 to $693,750 | Over $693,750 |
| Married filing separately | Up to $11,000 | $11,001 to $44,725 | $44,726 to $95,375 | $95,376 to $182,100 | $182,101 to $231,250 | $231,251 to $346,875 | Over $346,875 |
Long Term Capital Gains
If you owned the property for at-least 12 months the gain will be taxed as long-term income with a significantly lower tax rate and ranges from 0% to 20%.
2024 Long-Term Capital Gains Tax Rates
| Capital Gain Tax Rate -> | 10% | 15% | 20% |
| Single | Up to $47,025 | $47,026 – $518,900 | Over $518,900 |
| Head of household | Up to $63,000 | $63,001 – $551,350 | Over $551,350 |
| Married filing jointly | Up to $94,050 | $94,051 – $583,750 | Over $583,750 |
| Married filing separately | Up to $47,025 | $47,026 – $291,850 | Over $291,850 |
How to Avoid Capital Gains Tax in Kentucky
One way to avoid capital gains tax in Kentucky is if you’ve lived in the house for at least two of the past five years, you can exclude up to $250,000 of the profit from your taxable income if you’re single, or up to $500,000 if you’re married filing jointly.
If you don’t meet the residency requirement or you exceed the exclusion limit you’ll pay capital gains tax on the excess profit as ordinary income. As mentioned earlier ordinary income rate depends on your annual income and filing status.
There are some tax deductions that you may be able to take advantage of when selling a house in Kentucky. For example, you can deduct certain selling expenses from your taxable income, such as real estate agent commissions, marketing costs, legal fees. These expenses can add up and be a substantial tax deduction, don’t overlook this like many home sellers do.
Other Real Estate Taxes When Selling a House in Kentucky
Kentucky Property Transfer Tax
In Kentucky sellers are responsible for paying the state property transfer tax, which is calculated based on the sale price of the property. The tax rate is $0.50 per $500 of the sale price, or 0.1% of the sale price.
For example, if your house sells for $200,000, you’d owe $400 in property transfer tax. It’s important to note Kentucky law doesn’t allow this tax to be passed on to the buyer.
3 Ways to Reduce Your Taxes When Selling Real Estate
Step 1: Understand tax deductions
If you’ve lived in the property for at least two of the past five years, you can exclude up to $250,000 of the profit from your taxable income if you’re single, or up to $500,000 if you’re married filing jointly.
You can also deduct certain selling expenses from your taxable income, such as:
- real estate agent commissions which are typically about 6% of the sales price, or $6,000 per $100,000.
- marketing costs related to the sale like advertisements in the paper or online listings.
- legal fees involved with selling like title searches, closing paperwork and filing fees.
Step 2: Keep good tax records
- Keep accurate and up-to-date records: Make sure you have a system in place for tracking your income and expenses, including receipts, invoices, and bank statements. It’s a good idea to use accounting software or an online tool to help you keep track of your records.
- Retain records for the required time: The IRS requires taxpayers to keep records that support their tax returns for at least three years from the date the return was filed. Some records, such as records related to property, should be kept for longer periods. Consult with a tax professional to determine the appropriate retention period for your records.
- Back up your records: Make sure to back up your records in case of loss or damage. You can use cloud storage, an external hard drive, or another secure method to back up your records.
Step 3: Hire a tax professional
A tax professional can provide you with personalized advice based on your unique financial situation and help you navigate the complexities of tax laws. They can also help you take advantage of any available deductions and credits, which can ultimately reduce your tax burden.
Overall, while it may seem like an additional expense to hire a tax professional, the benefits can far outweigh the costs. Not only can they help you save money on your taxes, but they can also provide peace of mind and help you make informed financial decisions.
Taxes on a House Sale in Kentucky in Summary
In conclusion, selling a house in Kentucky can be profitable, but it’s important to be aware of your tax obligations, eligible deductions and ways to reduce your tax liability
- Understand tax deductions
- Keep good tax records
- Hire a tax professional
By understanding the tax rules and working with professionals who can guide you through the process, you can ensure a successful sale with minimal stress and maximum financial benefit.
About Us – We Buy 502
Hi, I’m Nyx Sherwin owner of We Buy 502. We’re a small, family-owned business located in Louisville, KY and we’ve also called Lexington and Bowling Green home.
We know selling a property can be a long and tiresome process. From repairs, to showings, negotiations and the waiting game to close. We believe there’s a better way to sell real estate that most don’t consider.
Our process to buy your property is straightforward and simple.
Call us today at (502) 849-5950 to get a cash offer today!
We buy all over Kentucky in major cities like Louisville, Lexington, Elizabethtown, Bowling Green, Owensboro and surrounding areas. Even more rural areas of Kentucky like Frankfort, Georgetown, Richmond, Radcliff, Glasgow, Scottsville and Smiths Grove. Learn more about us and the markets we buy houses, apartments, condos and land.
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