To cut right to the chase: You can absolutely sell a house with a mortgage. In fact, it happens all the time. Most mortgages come with 15- or 30-year terms, while the average time people lived in their homes before selling in 2022 was 10 years, according to data from the National Association of Realtors.

“Here’s the big thing to understand: Most people have mortgages on their home,” says Kevin Bartlett, a top real estate agent in Southwest Florida who sells homes 49% quicker than other agents in his market. “And since the average person stays in their home for less than ten years, it’s extremely common to sell a home with a mortgage.”

So thankfully, you are not stuck in a home until you pay off every last dollar. Read on for what you need to know about what happens when you sell a mortgage, plus insights on how to gauge the right time to sell and set the right asking price when you still owe on the home.

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Can You Sell A House With A Mortgage?

You can absolutely sell your home if you have a mortgage. Much of the process of selling a home with a mortgage is the same as selling a home you owe free and clear. The key difference is that the money you still owe your mortgage lender will come out of your sale proceeds.

Here’s an overview of what the process looks like:

• You’ll use the proceeds from the sale of your home to pay off your existing mortgage balance. Your lender will receive their payout at the time of closing.
• After satisfying the mortgage debt and covering the fees associated with selling a house, such as commissions and taxes, you will (hopefully!) have some profits to take home.
• If the amount received from the sale falls short of your outstanding mortgage balance and selling costs, you will have to cover the difference with funds other than those from the sale.
• Even in today’s slowing housing market, property values remain moderately high from the pandemic homebuying boom. Therefore, it’s uncommon for sellers to owe more than their home is worth, a situation known as being “underwater.”
• A mortgage is more likely to become underwater if a seller falls behind on mortgage payments, sells before they’ve gained much equity, or sells during a market downturn.

Ultimately, when it’s time to sell a home with a mortgage, the path isn’t one size fits all. You’ll need to evaluate how much equity you have in your home and your reasons for selling. Follow the steps below for an in-depth explanation of the mortgaged home sale process.

DISCLAIMER: This post is meant to be educational and should not be construed as financial or legal advice. If you need help navigating the decision to sell a house with a mortgage, HomeLight encourages you to reach out to a professional advisor.

1. Check your home value

Before you list, start by getting an idea of how much your home is worth. For a ballpark figure, you can use a free online home value estimator.

“Depending on the price range of the home, I tell my clients that they need to be ready to spend 9%–10% of the sale price on selling costs, including the real estate agent commission and closing costs,” says Joanne McCoy, a top-selling real estate agent in Lincoln, Nebraska.

That doesn’t account for the money spent on preparing the home for listing or moving fees. To assist in tracking your total costs, we’ve put together a list of the common fees associated with selling a home, along with a description and the typical amount of each.

You can use this information to better estimate the amount you’ll actually pocket for reinvesting into your next home or creating your retirement nest egg.

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Enter a few details about your home and we’ll provide you with a preliminary estimate of home value in less than two minutes. This won’t be a guarantee of what your home will sell for, but it is a helpful starting point.

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Start with a home value estimate

A quick online price estimate can be a helpful starting point to orient yourself in the process. Using recent sales records, market trends, and your home’s latest selling price, HomeLight’s Home Value Estimator provides a preliminary range of value for your property in under two minutes. Enter your address to get started. It’s fast, and it’s free.

Real estate agent commission (5.8%)

One of the first things you should do when you decide to sell your home is hire a top local agent. Research shows an agent’s expertise makes a big difference: In 2022, agent-assisted sellers sold their homes for a median of $345,000, compared to $225,000 for FSBO sellers.

If you work with a real estate agent, you’ll need to pay a commission for their assistance in pricing your home, marketing it to the masses, and negotiating with the other parties in order to get you the best possible price and terms, among other services.

According to HomeLight’s transaction data, the national average real estate agent commission is 5.8% of the property sales price. That commission covers the listing agent and buyer’s agent fees. (It’s customary for the seller to pay both.)

To access commission data specific to your area, consult HomeLight’s commission calculator and enter your city.

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How is your commission divided between agents?

Your real estate agent’s commission is not only split between the buyer and seller agents but also their respective brokerages. Every agent has an agreement with the brokerages in which they hold their real estate license as to how their commission is split.

For example, say you sell your home for $300,000 with a 6% commission rate and each agent has a 60/40 split agreement with their brokerages. That puts your commission at 18,000. Here’s how that will break down:

• Seller’s agent:  $5,400 (60% of their $9,000 commission share)
• Seller’s broker: $3,600 (40% of their $9,000 commission share)
• Buyer’s agent: $5,400 (60% of their $9,000 commission share)
• Buyer’s broker: $3,600 (40% of their $9,000 commission share)

Staging and prep fees (1%-4%)

When it comes to selling your home, presentation matters. Now, that doesn’t mean you should drop everything to remodel entire rooms that aren’t perfectly modern. According to HomeLight’s Top Agent Insights survey for Spring 2023, you won’t recoup all of your renovation costs — 85% of your spend for a kitchen remodel and 98% for a bathroom remodel.

You may be better off doing light prep work and keeping your budget restrained. Here’s where you can focus your efforts and about how much you can expect to spend on each project:

Declutter ($400 for dumpster rental)

Research shows that decluttering your home prior to listing will pay off in huge rewards. In fact, a HomeLight survey of top agents shows an estimated price increase of $6,523 for decluttering. Clear those countertops, organize the kids’ toys, and remove items junking up your floors — it’s well worth the effort!

Buyers want to envision what your home will look like with their own furniture, and getting rid of unnecessary items and distractions will make your home more attractive.

Decluttering can be done for the cost of sweat equity, though some sellers may need to anticipate costs for junking and storage. Renting a dumpster costs $381 on average. Combine that with some trips to Goodwill and the recycling center to keep decluttering costs manageable.

If you need to rent a temporary storage unit, expect to pay an average of $180 per month. DIYers can follow HomeLight’s decluttering checklist for more guidance.

Deep clean ($300 per clean)

Deep cleaning your home before listing can result in an estimated price increase of $3,731.

A professional deep clean will cost you about $300 on average, but you could save that money and tackle the job yourself using HomeLight’s deep cleaning guide. Scrub the bathrooms and clean the kitchen until it sparkles. Don’t forget easy-to-miss cleaning spots like baseboards, ceiling fans, and window sills.

Apply a fresh coat of paint to interior walls ($2,000)

The safest bet for increasing your home’s appeal to prospective buyers remains bright but neutral colors. Even if you already have fairly neutral colors in your home, a new coat of paint can make a home look and feel fresher overall.

A recent HomeLight survey concludes that buyers prefer light and white color schemes in the kitchen, according to 84% of agents.

Expect professional painters to charge $2-$6 per square foot, or you can do the job yourself for $200-$300.

For more inspiration, you can visit HomeLight’s post on the top home paint colors to sell your house for a room-by-room guide.

Freshen up your flooring ($1,800)

If you have hardwood floors, and they’re in good shape, simply shine them up with some gentle floor cleaner. You can also opt to refinish them for an average cost of $1,831.

Install new hardwood floors for $4,720 or replace dingy carpets for $784-$2,809, depending on the size of the space and the carpet material. If your carpets are decent, rent a carpet cleaner for as little as $27 (for four hours) or pay a pro $75-$125 per room. If you’re selling a high-end home, buyers will likely come in and replace any carpet with hardwood, anyway.

Add curb appeal (average $3,500)

According to HomeLight’s 2022 Top Agent Insights report, buyers will pay 7% more for a home with great curb appeal than a home with a neglected exterior. HomeLight’s top agents estimate spending approximately $3,467 on curb appeal will yield around $11,718 in resale value, a 238% return on investment.

Make sure you mow the lawn, fertilize the grass, edge your walkways and flower beds, and pull up any weeds. HomeLight data shows that if you invest just $340 in basic yard care, you could gain an average of $2,173 in value. Install fresh mulch for another $1,749 boost.

Stage your home ($1,800)

New York real estate agent Rory Clark says there are two distinct advantages to staging your home. First, your property will sell much quicker. 48% of listing agents reported that staging a home decreases the time on market, according to the National Association of Realtors® (NAR).

Secondly, you’ll increase your resale value with a relatively easy solution. A professional staging service will cost you $1,773 on average (even less if your listing agent stages the home themselves). For that investment, 20% of agents reported an increase in resale value of 1%-5%. Another 14% of agents reported a 6% -10% increase.

“There is absolutely going to be an exponential return for a turnkey and staged property,” Clark says.

Adding up prep costs

A seller who completed all these tasks would spend around $9,800 preparing their home for sale, which amounts to around 2.6% of today’s median home sale price of $375,700. However, some sellers’ to-do lists may be shorter if their home is in great shape, or it could require a little more TLC to be marketable. Talk to a top real estate agent about what your house needs and what they recommend putting in for the best ROI. In the 2023 market, homes are selling fast, and less is probably more.

Though California is often regarded as a high-tax state, its property and other real estate-related taxes are more middle of the road.

“The perception here is that state income taxes are high, but just on the real estate taxes themselves, they’re pretty comparable to the rest of the country,” said Craig Aird, an associate attorney with Donahoe, Young & Williams LLP who specializes in estate planning, tax, and immigration.

Some of California’s real estate taxes do vary throughout the state, however, as do the expectations on who pays certain portions of a real estate transaction.

To help you navigate some of these complexities, we’ve compiled a list of what you can expect to pay in taxes when selling a house.

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Capital gains tax

If you profit from the sale of a home in California, then you may owe some amount of capital gains tax unless you qualify for an exclusion, which we’ll address under the chart below.

Capital gains are the profits made when you sell an appreciable asset, such as a house. For example, if you buy a home for $200,000 and sell it for $500,000, then you have a capital gain of $300,000.

In California, capital gains are taxed by both the state and federal governments.

On the state level, California’s Franchise Tax Board (FTB) taxes all capital gains as regular income. Depending on your tax bracket, the tax can be anywhere from 1% to 13.3%.

On the federal level, gains can either be considered short-term or long-term.

• Short-term capital gains are when you sell an asset within a year of purchasing it. Those gains are included in your ordinary income and taxed according to your tax bracket.
• Long-term capital gains are any profits made from the sale of an asset after at least a full year of ownership. For a home sale, those gains are taxed according to the following table.

Source: IRS Topic No. 409

Both the IRS and FTB provide a capital gains tax break for home sellers who meet certain conditions. The maximum amount of capital gain that can be excluded is $250,000 for single filers, or $500,000 for a married couple filing jointly.

To qualify for the full exclusion amount, according to IRS Publication 523, the following criteria must be met:

• The home being sold is your primary residence.
• You’ve owned the home for at least two years in the five-year period before selling it.
• You’ve lived in the home for at least two years within the five-year period before selling it. The years you’ve lived in it don’t need to be consecutive. Certain exceptions to this rule are made for those who are disabled or those in the military, Foreign Service, intelligence community, or Peace Corps.
• You didn’t acquire the home through a like-kind exchange (also known as a section 1031 exchange) within the last five years. This is basically when you swap one investment property for another.
• You haven’t claimed the exclusion on another home in the last two years.
• You aren’t subject to expatriate tax (a government fee paid by those who renounce their citizenship or take up residency in another country).

If you don’t quite check all of these boxes, you may still qualify for a partial exclusion of gain. This can happen if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event. For details on such circumstances, please refer to IRS Publication 523.

How to report your California capital gains taxes

For your federal return, report your capital gains and losses by using U.S. Individual Income Tax Return (IRS Form 1040) and Capital Gains and Losses, Schedule D (IRS Form 1040).

For your California capital gains, file California Capital Gain or Loss Schedule D (540).

California transfer taxes

A transfer tax is a transaction fee tacked onto the sale of any land or real property.

California’s documentary transfer tax varies depending on the location within the state.

The law permits general law counties and cities to charge 55 cents per $500 of property value or the amount paid ($1.10 per $1,000).

This amount can only be increased by charter counties or cities — those that have adopted a charter and therefore have supreme authority over municipal affairs. Of California’s 479 cities, 121 have charters.

Here are some examples of what the documentary transfer tax looks like in a few of California’s largest cities:

*The transfer tax rate in some cities is tiered so that the greater the purchase price or market value, the greater the tax.

When transferring a home in California, the seller usually pays the tax, but this can be a point of negotiation during the transaction. If left unpaid by the time the sale goes through escrow, then the payment responsibility automatically falls on the buyer.

Property taxes owed

Annual property taxes in California have two payment stubs. They can be paid simultaneously or in two installments.

The first installment is due Nov. 1 and becomes delinquent Dec. 10. The second installment is due on Feb. 1 and becomes delinquent April 10.

Once a home is sold, the seller is no longer responsible for its property taxes.

For example, if the fictional Jim and Susie pay the first installment in November and then sell their Sacramento home in December, it is now up to the buyers to cover the second installment due in the spring.

Aird says he experienced a scenario like this firsthand as the buyer of a California home in 2021.

“Part of the closing cost was paying into an escrow for that next property tax payment that was due in a few months,” Aird says. “It was our responsibility as the buyer.”

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What about selling an inherited home in California?

For starters, there are no estate or inheritance taxes in California. So you don’t owe taxes just for inheriting a property.

As the heir, however, you do take on any debts attached to the property, such as an outstanding mortgage.

When selling an inherited home, many of the same considerations apply as they do to selling any California property. Where things differ the most are with capital gains.

Fortunately for heirs, the values of inherited assets are adjusted by what’s called a stepped-up basis, says Aird. This means that no matter how much a home has appreciated in value since originally purchased, a decedent’s heirs are not responsible for paying the taxes on those historical gains if they choose to sell the home. Rather, the property automatically converts to the current fair market value.

If the heirs choose to immediately sell that property for the assessed fair market value, then there are no gains to speak of. However, if they sell the property for more than the fair market value, or choose to hold onto the property for a while before selling and its value continues to appreciate during that time, then those are considered taxable gains.

Other selling expenses to anticipate in California

• Title fees: These consist of title insurance and a title search. Title insurance is a contractual obligation to protect against any issues with a home’s title, such as illegal deeds, undiscovered wills, or forgeries. In Northern California, it is customary for the buyer to pay for the title insurance, but the opposite is usually the case in Southern California. It’s not uncommon for the parties to negotiate over this item or split the cost, which can range between 0.5% and 1% of the sale value. A title search, which costs between $75 and $200, can be paid by either the seller or the buyer and is done to prove that the seller is the rightful owner of the property and that there are no outstanding claims or judgments.
• Settlement fees: Amounting to about 1% of the home sale value, this lump sum (also known as escrow fees) is issued by the title company, escrow company or attorney that is facilitating the closing of the transaction. The payment is designed to cover all that’s involved in handling the final paperwork and distributing funds to the appropriate parties. As with title fees, this can be paid by either the buyer or seller, but is often split between both parties.
• Agent commissions: The agent commission fee in California is generally about 6% (3% for the buyer’s agent and 3% for the listing agent). The seller typically pays for both agents’ commissions.

Ways to prepare for real estate taxes

Real estate taxes don’t need to be a surprise or intimidating.

There are some simple steps to take that can help you prepare for what’s to come if you decide to sell a home in California.

• Know your home’s value: One initial step is to use an online Automated Valuation Model (AVM) tool like HomeLight’s free Home Value Estimator. Having a ballpark idea of what your home might be worth can help you calculate the potential capital gains from the home sale.
• Save the right documents: Another step is to know what tax documents you will need if you purchased or sold a home. Consult with your tax advisor about the federal and state documents required to file in California, and what tax breaks might be available for your selling situation.
• Find a top agent: Another helpful step can be to partner with an experienced real estate agent who can guide you through the home sale process. A qualified agent can help you understand the tax ramifications and ensure a favorable outcome by maximizing your profit. Our data shows that the top 5% of real estate agents across the U.S. sell homes for as much as 10% more than the average real estate agent.

HomeLight makes it easy to find top-performing real estate agents in your market. We account for factors like the real estate agent’s sale-to-list price ratio and how that maps to local price trends so that you can find top agents who will put more cash in your wallet when you close.

Header Image Source: (Shen Pan / Unsplash)

For this post, we’ve consulted with experienced professionals to compile a starting checklist for you of all the home sale-related documents you’ll need at tax time. We spoke to top Missouri real estate agent Chris Skinner, who’s also an attorney at law and Certified Public Accountant (CPA) with over 20 years of experience, and Nathan Rigney, lead tax analyst at H&R Block, to find out what home sellers need to know this tax season.

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DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to a professional advisor regarding your own situation.

What documents do you need for taxes if you sold a house?

There are a few documents you’ll need when you file your taxes if you sold a house in the previous year. Knowing which ones you need, which ones you don’t need, and where to get them if you need them can become confusing, so we’ve worked with the experts to help break it down for you.

1. 1099-S form to report your capital gains

Federal tax law generally requires lenders or real estate agents to file a Form 1099-S, Proceeds from Real Estate Transactions, with the IRS when you sell your home, unless you meet IRS requirements for excluding capital gains tax.

According to the Internal Revenue Service, you might not have to pay taxes on the sale of your home at all, thanks to capital gains tax exclusions. (More on that later.) However, if you don’t qualify for capital gains tax exclusions, your home sale will be reported to the IRS through a 1099-S form. Be sure to check with your personal tax professional to see if you might fit into one of these exclusions.

A copy of the 1099-S should be provided to you by the title or settlement company that handles the settlement, Skinner explains. “Typically, the 1099-S is issued at closing and will be included in the closing documents the seller receives at settlement. Note: the IRS will not be sending the 1099-S. The settlement company will issue it.”

If you didn’t receive one, it might be because you don’t need to file it. “If the profit (gain) on the sale of the home is less than $250,000 (for individuals) or $500,000 (for married filers), then no capital gains taxes will be owed” for most typical situations, Skinner points out. There are some requirements to qualify for this capital gains tax exclusion, which we’ll address below.

However, he adds, even if you owe no taxes, you will still need to report the sale of the home on your tax return. “This is because the 1099-S reports the gross proceeds of the sale and provides no information as to whether any is taxable or not.”

If you aren’t sure whether or not you should expect a 1099-S form, talk to your closing attorney (if your state requires one) or real estate agent.

If you need to file but didn’t receive a form, you can download it from the IRS website. You can also download or print an instructions PDF.

2. 1098 form as a record of your mortgage interest payments

Form 1098 is a mortgage interest statement to report mortgage interest paid to a lender on your home loan during the previous year (if it’s more than $600). “In a year where you have sold your home, you will still get a 1098 for the interest you paid for that portion of the year where the loan was outstanding,” Skinner says. It also includes itemizations for prepaid points, mortgage insurance or private mortgage insurance (PMI).

You can deduct the amount of mortgage interest you paid on your tax return. “Real estate taxes, in most cases, are also reported on there if you paid them through escrow,” says Rigney. The IRS adds a caution: be sure to report only the exact amount paid for real estate taxes. The amount you put in escrow is just speculative, based on estimated costs, but may not be the final total.

It’s important to note that the itemized deduction for mortgage insurance premiums has expired. You can no longer claim the deduction for 2022.

The loan company should mail a copy of Form 1098 to you. It may also be included in your January statement. If you didn’t receive one, it might be a good idea to contact your lender or download a form from the IRS website.

3. Closing Statement, which is a receipt for your home sale

A closing statement, or settlement statement, itemizes the costs incurred during your home sale. It’s sort of a receipt for your home sale.

You’ll find all kinds of important tax information included on the closing statement. For example, if you escrow your property tax payments with your mortgage company, they’ll be shown on this form. Any property taxes paid at closing should also appear on your settlement statement.

As Rigney explains, your closing statement “is going to have some of the information that you might need, like the application of property taxes and the amount that you paid the broker.”

To clarify some confusion about a change the IRS made in 2015, Skinner explains that the settlement statement you’ll receive is not an HUD-1. The HUD-1 was replaced by the Closing Disclosure, which contains nearly the same information as the settlement statement, but it’s specific to the borrower and their fees.

4. Records to determine your cost basis

It’s highly recommended that you keep receipts that prove your cost basis. The IRS defines the adjusted base as the cost of acquiring your home plus the cost of any capital improvements you made, minus casualty loss amounts, tax credits (like Residential Energy Credits) and other decreases (such as depreciation on rental property). 

As Skinner explains, “deductions pertain to ordinary income and expense items. The proper term is ‘reduction of sales proceeds’ when calculating gain.” Some examples include sales commissions and transfer taxes.

The basis can also be used to figure depreciation, amortization, casualty losses, and more. Skinner, however, points out that loss amounts and depreciation pertain only to rental property, not a primary residence.

“In general, your basis would be purchase price plus costs of purchase (i.e., transfer taxes), plus improvements,” Skinner elaborates. “Depending on the size of the improvements, that could add to the basis substantially.”

While you generally can’t deduct home improvements at the time you have the work done (with some exceptions for energy credits), keeping track of repairs could benefit you when it’s time to sell.

For DIY home improvement projects, it’s probably a good idea to keep those materials receipts. “If you did it yourself, you can’t include the value of your services, but you can include all the materials that went into it and any permits that you had to pay for,” says Rigney.

Essentially, therefore, your cost basis is typically your total investment in the home, which is used to determine whether you gained from the sale.

If the amount you make in selling your home, minus your selling expenses (such as closing costs), is more than your adjusted basis, it’s indicative of a capital gain on the sale. Or, as Skinner puts it: Sales price less the costs of the sale (i.e., commission), less basis gives you the amount of the gain.

5. Documents showing you had a work-related move

Did you know that Baby Boomers held an average of 12.4 jobs from ages 18 to 54? Moving for work is not uncommon. Some of those jobs required moving to a new home.

If you fail to meet the Section 121 requirements for full exclusion of the capital gain (i.e., the one-sale-in-two-years requirement or ownership and use requirements), it’s possible to still qualify for a partial capital gains tax exemption if you had a work-related move. For example:

• Your new job is at least 50 miles farther from your home than your previous job.
• You had no previous work location and started a new job that is at least 50 miles from your home.
• Either of the above is true for your spouse or home’s co-owner, or anyone else for whom the home was their residence.

It’s up to you to provide documentation proving that your move was work-related. “If you claimed a reduced exclusion because you got a new job in a different city and then moved because of it, you’re going to want some evidence of that,” says Rigney.

However, Skinner points out, there’s no one particular document required by the IRS to prove that a move was work related. “Any form of proof issued by the employer should suffice.” That could include an offer letter or notice of transfer.

Note that, as per the current IRS guidelines, you can only deduct the actual moving expenses if you are an active member of the U.S. Armed Forces moving because of a permanent change of station.

This exclusion is based on the amount of time you actually used your house as your primary residence.

6. Documents showing you had a health-related move

Here again, if you don’t qualify for the full exclusion of the capital gain from your home sale, it’s also possible to qualify for a partial capital gains tax exemption if you moved because of health-related events that occurred during your time of ownership and residence in the home.

The four qualifying medical circumstances include:

1. A doctor recommended a change in residence for you because you were experiencing a health problem.
2. A doctor recommended a change in residence for your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.
3. You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
4. You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury.

According to the IRS, a family member includes your:

• Parent, grandparent, stepmother, stepfather;
• Child (including an adopted child, eligible foster child, and stepchild), grandchild;
• Brother, sister, stepbrother, stepsister, half brother, half sister;
• Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
• Uncle, aunt, nephew, or niece.

You’ll want to gather any medical documents related to the four qualifying circumstances. Some of these might be the same documents you use if you itemize your deductions for a taxable year on Schedule A (Form 1040), Itemized Deductions.

7. Documentation that proves your home was your primary residence

To qualify for the Section 121 capital gains tax exclusion, you must show that you own your home and that it was your primary residence for at least two of the five years prior to the date of sale.

To prove both, provide documentation with your name and address, such as:

• Utility bills — electricity, water, gas, sewage, trash
• Bank statements
• Copy of your voter registration
• Tax returns

8. Any documentation, records, or receipts from your home sale

Summarizing the documents and receipts you’ll want to keep, Skinner lists, “The original settlement from the purchase, records of improvements, and the final settlement statement from the sale should suffice.”

Rigney also advises that if there’s a question of whether you should save something or toss it, always save it. It could come in handy when tax season rolls around, especially if the IRS chooses to look into your home sale. “You’re going to need records in case you get audited,” he says.

Some profit on a home sale can be tax-free

Profits made from the sale of appreciable assets – including your home – are often considered capital gains and subject to tax. However, it’s possible to exclude the profit, or capital gains, you made from selling your home when tax time rolls around if you meet certain criteria.

Under the capital gains tax exclusion, in the sale of a primary residence, the first $250,000 of profits are typically not taxed if you file your taxes as single (or $500,000 if you and your spouse file jointly) – and if you meet additional requirements. The IRS refers to this as the Section 121 exclusion.

There are some helpful things to keep in mind before you assume you can avoid paying taxes on your home sale.

Section 121

Eligibility under Section 121 requires passing the “ownership” and “use” tests:

• You must own the house for at least two years.
• You must have lived in the residence for at least two of the previous five years. (However, if you or your spouse is on qualified official extended duty in the Armed Services, the Foreign Service, or the intelligence community, you may be able to suspend the five-year test period for up to 10 years.)
• You can only claim this exemption once every two years.
• If you have more than one home, you can exclude the profit from your main residence.

There are many nuances to the Section 121 exclusion. It’s always best to consult your tax professional for the most up-to-date information in your state.

“I tell everybody to consult with their tax financial advisors because it depends on your estate planning needs, your age, where you’re at income-wise and investment-wise. It’s not really cut and dried,” says Chris Carter, who ranks in the top 2% of 2,633 agents in Jackson County, Missouri.

Q&A: More expert tips and insights about your home sale and taxes

Do you always get a 1099 when you sell a house?

No. Certain exceptions can apply (e.g., if you qualify for one of the Section 121 exemptions, you may not receive a 1099-S).

What is a 1098 tax form used for?

The 1098 form is generally used to report mortgage interest in excess of $600 that you received.

Can I use the capital gains exclusion on the sale of my rental property?

Profit made from selling a rental property or a vacation home can often be taxed in its entirety. The capital gains exclusion generally applies only to primary residences.

Do I have to tell the IRS I sold my home?

If you receive an income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you often must report the sale of your home, even if the gain from the sale is excludable, according to the IRS.

Bottom line: Saving these documents will save you time and frustration

You may not need to pay capital gains tax after you sell your home, but it’s often important and always helpful to keep all the documents related to the sale. This includes proof of residency as well as receipts for purchase and sale costs, improvements, and absolutely anything else you think you may possibly need one day.

These documents may be required to prove you qualify for capital gains exemption, to document tax deductions, or to get you through a tax audit if it happens.

For more suggestions, visit HomeLight’s Finances & Tax Implications landing page, and always be sure to consult with your professional tax advisor on the particulars of your situation.

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When you sell a home in Washington State, you can expect to pay some sizable transfer taxes.

The main thing to consider is the state’s real estate excise tax (REET).

Aside from that, there are lesser local transfer taxes, as well as the standard federal tax on capital gains you make from the home sale.

An additional state capital gains excise tax is also being reviewed in the courts after being found unconstitutional in March of 2022, but real estate is currently exempt from the new tax – a position that could change over time if the tax is reinstated.

With the help of a top Washington State real estate agent, we’ll take a look at each of these tax liabilities and how they add up when you sell your Washington home.

Connect With a Top Agent to Sell Your Washington State Home

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Our data shows the top 5% of agents across the U.S. help clients sell their home for as much as 10% more than the average real estate agent.

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What is Washington’s real estate excise tax?

This is the primary tax you’ll have to pay when you sell your Washington home. It’s based on the entire sales price (not just the profit), and the percentage you owe graduates as the sales price reaches specific thresholds.

Effective Jan. 1, 2023, the selling price thresholds for the state portion of REET will be as follows:

Most counties and local governments in the state also charge their own smaller REETs on top of the state’s rate. In most jurisdictions, this amounts to an additional 0.25% or 0.50% to each selling price threshold.

John Dirgo Deweese, an Ocean Shores, Washington, real estate agent with nearly 20 years of experience, says home sellers are commonly caught off guard by these taxes.

“It’s really something that only occurs for most people with the sale of a house or something like that,” he explains. “It’s a complete surprise to people when it comes up.”

For this reason, he usually breaks the news to his clients at the beginning of the selling process, and explains that REETs are unavoidable.

“Absolutely everyone pays this on every real estate sale,” he says. “There’s no exemptions, exclusions, nothing.”

Calculating the graduated real estate excise tax

Example A

Let’s say you’re selling your home in Oakville, Washington, for $600,000. Since the local REET in Oakville is 0.25%, the first $525,000 is taxed at 1.35% (.25% + 1.1%). The remaining $75,000 is taxed at 1.53% (.25% + 1.28%).

Example B

Now let’s say you’re selling your home in Seattle for $4 million. Since the local REET in Seattle is 0.5%, the first $525,000 is taxed at 1.60%. The next $1 million is taxed at 1.78%. The next $1.5 million is taxed at 3.25%, and the final $975,000 is taxed at 3.5%.

Is selling a house considered income or taxable gain?

Since Washington doesn’t have an income tax, and real estate is exempt from the state’s proposed capital gains tax – which is tied up in the courts anyways – the profits made from the sale of a home can’t really be classified as either income or taxable gain on the state level.

On the federal level, a home sale can be taxed as either regular income or a capital gain, depending on how long you’ve owned the property. If you buy and sell the home within the same year, any profit you make from that sale is considered a short-term capital gain and is taxed at the same rate as ordinary income.

If you’ve owned the home for at least a year before selling it, then any profit is considered a long-term capital gain, which typically has a lower tax rate.

Example

Let’s say you buy a home for $200,000 and then sell it for $300,000 nine months later. That $100,000 would be considered regular income and be taxed based on your tax bracket, of which there are seven ranging from 10% to 37%.

If you sell the home after a year of owning it, the profit would be considered a long-term gain and taxed at either 0%, 15%, or 20% (possibly higher in certain situations), depending on your overall income that year.

In a minute, we’ll review how gains are federally taxed on a home you’ve owned for two or more years before selling.

Is there a 7% additional capital gains tax on Washington home sales?

In short, not at this time.

What happened?

A 7% state capital gains excise tax on long-term capital gains in excess of $250,000 went into effect on January 1, 2022. The new law specifically targeted assets such as stocks, bonds, and business interests. Real estate was exempt from the start, so home sellers were never affected.

In March of 2022, the law was found unconstitutional by the Douglas County Superior Court in Quinn v. State of Washington. The state appealed the ruling to the Washington Supreme Court, where it is currently pending.

What to look out for?

Though real estate is currently exempt from the state’s proposed 7% capital gains excise tax, Realtors and other real estate professionals are still keeping an eye on what happens with the tax.

“We all know that capital gains taxes, and taxes in general, have a way of — once they’re in place — slowly expanding,” Deweese says. “That’s not an immediate concern, but it’s definitely something we’re kind of watching for in the future.”

How can I avoid capital gains tax on my home sale?

1. Standard tax exclusion

Long-term gains from a home sale can qualify for a standard tax exclusion if you’ve owned and used the home as your primary residence for two of the last five years prior to the sale. For it to qualify as your primary residence, you must occupy it for the greater part (6+ months) of each of those two years.

The exclusion is as follows:

• If you’re a single tax filer and you sell your primary home, you can exclude up to a $250,000 gain.
• If you’re married and filing jointly, you can exclude up to a $500,000 gain in the sale of your primary home.

You may take the exclusion only once during a two-year period.

For a list of exceptions to the primary residence eligibility test, see IRS Publication 523.

2. Calculating basis

To calculate the capital gains from your home sale, you deduct your home’s adjusted cost basis from the sales price.

A home’s adjusted cost basis is the overall amount you’ve put into buying, improving, and selling the home. This can include such costs as transfer taxes, escrow fees, appraisal fees, agent commissions, and any major capital improvements. For a list of the capital improvements you can add to the cost basis of your home, see IRS Publication 530.

Carefully adding all of these expenses up can reduce your taxable gains.

How much is capital gains tax on rental property or second home?

Unless you’ve owned and used your rental property or second home as your primary residence for two of the last five years prior to selling it, then the sale typically won’t qualify for the standard federal tax exclusion.

Two other methods of possibly reducing your capital gains from investment properties are through tax-loss harvesting and the 1031 exchange rule.

• Tax-loss harvesting is simply reducing your taxable gain from an investment by taking a loss on another investment. So if you make money selling your vacation home, perhaps you have some poorly-performing stocks you’d like to sell off before the year is up.
• The 1031 exchange rule allows you to defer capital gains by taking the money you’ve earned from your rental sale and reinvesting it into a “like-kind” rental property. This requires timely action. The new investment property has to be chosen within 45 days of the original property’s sale, and the new purchase has to be completed within 180 days.

When in doubt, talk to a professional

Washington’s real estate tax environment isn’t the harshest in the country, but it’s certainly not the cheapest.

“It’s fairly neutral,” Deweese says. “We have the benefit of no income tax, but we do have this excise tax.”

Those scales may shift, however, depending on what the final ruling is regarding the pending 7% statewide capital gains tax, and how the tax may evolve, if approved.

Either way, knowing how to navigate your local tax system can make a significant difference when selling a home. That’s why it’s always best to consult with a real estate accountant or tax professional, and partner with a top agent who specializes in this sort of work in your area. They can help you determine your adjusted cost basis and identify opportunities to reduce your capital gains liability, so you don’t pay more than you absolutely have to. Consult a tax advisor.

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But don’t fret. “Nine times out of 10 the lien can be paid off through the sale,” says Richie Helali, Mortgage Sales Lead at HomeLight Home Loans. “This way the seller doesn’t need to come up with [the debt] out-of-pocket earlier.” In other words, the proceeds from the sale can be used to cover the unpaid bills.

In this guide, we’ll fill you in on everything you need to know about selling a house with a lien and the steps to take to get to the closing table.

Can you sell a house with a lien?

Homeowners can sell properties with liens. For a buyer to take possession of the property, the seller will need to clear title and satisfy all outstanding liens.

Stephen Donaldson, a real estate attorney and founder of The Donaldson Law Firm in New York explains that creditors record liens in the county clerk’s office in order to protect their interest. “The lien puts the world on notice of the creditor’s interest in the property.”

“If an owner tries to sell their house, a title search will identify any liens recorded against the property. In order for the sale to occur, the title company ensures that any liens are satisfied at closing so the buyer can take title free and clear of any liens.”

The following payment options are worth considering to clear your title:

• Pay the debt upfront
• Negotiate the debt for a lesser amount you can afford
• Dispute debt errors with the assistance of an attorney
• Work the payoff into the sale proceeds

Stressed About Selling a House With a Lien?

Sometimes the easiest way to sell a house with a lien is to get a cash offer from an investor who is familiar with the process of resolving the title issue and can walk you through it. Take the next step by providing some information through our Simple Sale platform and we’ll help show you some potential options.

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Types of property liens

Property liens can be voluntary or involuntary. Mortgage liens, for instance, are voluntary; the borrower agrees to have a lien recorded against their property as collateral for the loan. Other liens are involuntary; they’re recorded by a creditor or a plaintiff who won a judgment for an unpaid debt.

Mortgage lien

The most common type of property lien is a mortgage. There are typically two levels or priorities of mortgage liens: primary and secondary.

Primary lien: The first mortgage is the primary lien. “A mortgage lender always wants to make sure they have that first priority lien,” says Donaldson. “If a homeowner defaults, the lender wants to ensure they get as much money back as possible first without any regard to the second lien holder.”

Secondary lien: If a homeowner already took out a mortgage to be recorded against the property to buy the house, they already have some home equity and may wish to borrow against that equity from the same or a different lender, Donaldson explains, in the form of a second mortgage.

“In order to get that home equity line of credit, that lender would have a lien in the second position or a second priority lien,” according to Donaldson.

Tax lien

The government has the power to record tax liens on properties when the homeowners owe back taxes. To remove the lien, the property owner will need to satisfy the debt. Homeowners can also enlist the help of a real estate attorney to either negotiate or dispute the lien.

Tax liens often take priority over all other liens, including primary mortgage liens. This is part of the rationale behind most mortgage lenders including property taxes in mortgage payment schedules, and pay taxes on behalf of the borrower through an escrow account – it helps mitigate risk and protect the lenders’ interest in the property.

The federal government also has the power to file IRS liens against property owners who fail to pay back income taxes on money they’ve earned. When IRS liens remain unpaid, the federal government can foreclose on a property to collect the debt. It’s also important to note that state and local governments may also file tax liens for nonpayment of state or local levies and taxes.

Judgment lien

Judgment liens, or judicial liens, are recorded against real estate when a judge issues a judgment against a property owner who loses a lawsuit and court-ordered damages remain unpaid. Selling a house with a judgment lien requires court approval.

Child support and alimony liens

If a property owner fails to pay court-ordered alimony or child support, a lien can be placed against the property. The judge may allow the owner to sell the home, however court approval can take a long time, reports Helali.

HOA lien

Homeowner associations can record liens for unpaid dues and outstanding fines. HOA’s may initiate foreclosure even when mortgage payments are current, if the state and the association covenants, conditions, and restrictions allow it.

Mechanics lien

A mechanics lien, also known as a construction lien, can be recorded against a property for unpaid construction work, beginning 90 days after payment is due. Like other liens, mechanics liens can cloud a title making it difficult to sell a property. Liens that fall under the broader category of mechanics liens include:

• Materialman’s or supplier’s liens: for contractors that supply materials for construction or home improvement projects
• Designer liens: recorded by engineers, architects, and other designers when services remain unpaid

7 steps to selling a house with a lien

In most cases, you can simply pay the debt and move forward with the home sale, says Steffany Farmer, a top Savannah, GA real estate agent who’s worked through over 775 real estate transactions.

“If you can’t afford to pay the debt right away, your agent may negotiate to wrap the cost of [the lien] into your closing costs, but plan to deduct the expense from your home sale proceeds.”

Get Assistance Selling a House With a Lien

A lien can complicate a home sale, but it doesn’t have to derail it entirely. An experienced real estate agent can help you navigate the process step by step, present your options, and help maximize your property value.

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Property liens can be removed by paying the debt in full, or by negotiating with creditors to accept a lower payoff. Consider the following steps when selling a house with a lien.

1. Pay the lien upfront: If you have the means to pay the debt, making the payment will clear your title and is the most straightforward approach.

2. Negotiate the debt: When you don’t have enough equity in a property (for example, you owe $150,000 but you only have $50,000 equity in your home) consider hiring an attorney to negotiate the debt to a lower payoff amount.

3. Dispute the lien: You can hire an attorney to dispute a lien that you’ve already paid, or believe is a higher amount than what you actually owe.

4. Get a payoff letter from creditors: After you’ve confirmed, negotiated, or disputed the debt, ask the creditor for a payoff letter of what you owe. Then provide it to your escrow agent if you’re working the debt into the sale settlement.

5. Use the sale proceeds to pay the lien: One of the easiest ways to pay a property lien is to work the debt into the sale proceeds. Ask your creditor for a payoff letter and your escrow agent will do the rest.

For an estimate of the amount of money that your home might bring in a sale, use HomeLight’s Home Value Estimator. By answering seven simple questions, you’ll get a ballpark estimate of what your home is worth on the current market in minutes.

6. Sell a house with a lien for cash: In certain circumstances, depending on local law and regulations, a property owner may sell a house for cash with a lien still encumbering the property. However, even under circumstances where this is allowable, the lien will remain with the property; and if the new owner wants a clear title or financing in the future, they’ll need to address and potentially satisfy the lien. A better option is to pay the lien through the proceeds of the sale. If you want to sell your house for cash, consider HomeLight’s Simple Sale platform to:

• Receive a competitive cash offer
• Sell your home in as few as 10 days
• Sell your house “as-is” with no repairs or agent fees required

7. Obtain a lien release: Once you pay the debt, the lien holder is obligated to provide you with a recorded document called a lien release stating the debt is paid and the lien is removed. The document is sometimes known as a “satisfaction of mortgage,” a lien discharge, or lien termination. Make sure to get that document.

5 ways to prevent title issues and closing delays

1. Conduct a title search: According to the National Association of Realtors®, unclear titles account for around 11% of closing delays; therefore, always perform a title search to uncover lien issues before a buyer does. Since liens are public record, they’re easy to locate in the following three ways:

• Ask the title company to order a title search for your property.
• Visit the county recorder website and input the name and address of your property.
• Visit the county recorder’s office in person and ask the clerk for assistance with your title search.

2. Pay your mortgage, taxes, contractors, and bills on time. This will avoid the need for creditors to record a lien in the first place.

3. Inform your real estate agent if your property has a lien. It’s not unlikely that your real estate agent will have experience in selling a property with a lien.

4. Arrange a payment plan with creditors immediately when you’re behind on payments or discover a lien on your property.

5. Ask for proof of payment from contractors. Make sure any contractors you hire have paid their subcontractors, suppliers, and laborers, then get a release of lien from all.

Navigate the route to a smooth closing

A knowledgeable agent is your ally, so make sure to keep them in the loop every step of the sale.

“Sellers should always be upfront and forthcoming with their agents because they’ll make the transaction easier,” Helali says.

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If you’ve never heard of seller financing, you’re not alone. Seller financing — also known as owner financing — is much more common when selling a business than when selling a home. Seller financed mortgages accounted for just 6% of mortgages from 2009 to 2019.

But with the tightening credit market and less liquidity all around, seller financing might be the way you get a good price and a quick sale on your home. So what is seller financing, how does it work, and when does it make sense? Let’s dig in.

What is seller financing?

People usually finance buying a house through a bank or other traditional lending institution. That’s where most homeowners send their mortgage payment every month.

With seller financing, you, the seller, lend the buyer credit for part or all of the purchase price, minus a down payment, and the buyer makes monthly payments to you. You are the lender.

With seller financing, you extend credit in a short-term loan, minus a down payment, for some or all of the remaining price of the house. You and the buyer sign a promissory note, and the buyer pays you month to month, with interest.

When and for whom selling financing makes sense

Seller financing can make sense in certain markets or situations. In HomeLight’s New Year 2023 Top Agent Insights report, agents surveyed by and large agreed that in most markets the hot seller’s market of 2020-2022 has ended. Houses are no longer garnering multiple offers in most markets and the average home price dropped from $413,800 in June 2022 to around $380,000 (which is still significantly above their pre-pandemic levels). In a cooling market, seller financing could be worth considering, in certain situations.

One such situation is when you would rather have a staggered income over a few years vs a lump sum payment or when an otherwise perfect buyer won’t qualify for a traditional mortgage. This may be because they just moved to the area, are going through a divorce, or the property type is difficult to get a mortgage for.

Perrin Cornell, an East Wenatchee, Washington agent with over 100 Single Family Home transactions, elaborates that this situation can include when you’re selling “a hundred acres of land or even just twenty acres of land, depending where it’s located. Or an older house that needs a whole lot of renovation, and the buyers are planning on renovating it and flipping it.”

Another situation where seller financing makes sense is if you’re selling a farm. The largest lender for farm financing is the federal government, but those loans can take anywhere from six to 24 months to process and maybe you don’t want to wait 2 years.

The high interest rates being offered by lending institutions in 2023 is deterring some buyers. Seller financing enables you to offer a better rate than the banks, while still making a profit for yourself. For buyers on a budget (which is most of them), lower interest rates could be the reason they bid for your home vs another comparable one.

Dylan Snyder, a Jupiter, Florida top real estate agent with nearly 25 years of experience, says he’s only had clients use seller financing a couple of times because “all the stars have to be in line. It doesn’t always happen.”

Options for seller financing

There are a few different ways you can set up seller financing:

1. All-inclusive seller financing loan: you finance the entire cost of the house minus the down payment.
2. Junior seller financing loan: you finance only part of the cost of your house, minus the down payment. It’s often the difference between the house price and what a traditional lender is willing to cover.
3. Land contract: both you and the buyer share ownership — called “equitable title” — until the final payment is made to you. The buyer lives in the house and covers maintenance, taxes, and insurance, but the deed is not fully transferred until the house is fully paid for.
4. Lease option: you lease the home for a fee and promise to sell it to the lessee within a specified time. Some or all of the rental payments can go toward the purchase price.
5. Assumable mortgage: the buyer takes your place on the existing mortgage you have with your own lender. Your lender has to approve, of course!

Risks and challenges of seller financing

The main obstacle for many sellers is that you have to own your home free and clear to offer this option. If you still have a mortgage, your lender has to approve seller financing, which is rare.

Say you do own your home. You do offer seller financing, and that home gets sold. Remember that you might now be the sole lender.

That’s fine, as long as the payments keep coming every month. But what if they stop? Where do you turn then? Nowhere. This job is yours, and yours alone, to handle.

Imagine that. Foreclosing is your problem, and you may spend in the tens of thousands of dollars on legal and other fees, plus spend the time it takes to supervise the foreclosure process.

In the meantime, you are no longer getting that payment every month you were counting on.

The maintenance, property taxes, and insurance? It’s still your house. Yup, they’re all suddenly your problem again.

While you’re hacking your way through this jungle, the value of your house could be dropping…and dropping. How excited are you to start the selling process all over again from the beginning for a house that now appraises for less?

The other downsides of seller financing

If you are doing partial financing, along with a lending institution, and foreclosure happens, the bank gets paid in full first. You have to sit and wait for yours, and that could be a very long wait.

Even if everything goes well, the taxes in a seller-financed purchase are extremely complicated, and you will need to be organized with your documentation and should consider hiring a professional. Home sale tax implications are complicated and your eligibility to have part of the profit from a primary residence sale be tax-free may have changed.

For your own protection, you will need a loan application and all relevant documents from the buyer, and it’s on you to get everything checked and vetted. Remember, you’re doing all the lender work here.

Minimizing the risk of seller financing

Seller financing has risks, but they can be managed if you approach it as professionally and as thoroughly as a financial institution would. This means, getting your documents in order.

Get a complete loan application as thorough as a bank would use, and take the time to confirm every detail of the buyer’s financial situation. You can find basic applications online.

The contract needs to state that the sale is subject to your approval of the application. You may need legal assistance to get these steps right.

Make sure the loan is secured by the property: ensure the right to foreclose if necessary. You do not really want that house back, but at least you will get it. If you need to, you’ll be able to sell it again.

Do not accept less than a 10% down payment so your agent and escrow fees are covered. You are more secure with a buyer who has a serious financial investment in the house.

Cornell shares that “I typically tell my sellers and the buyers that they should have somewhere around 30% or more as a down payment. That way if the seller does have to take it back, they have some cash to mitigate any problems. And in turn, the buyer isn’t likely to walk away from it if they’ve got some significant money in the deal.”

Don’t let impatience tempt you to accept a buyer your instincts tell you is not a safe bet. Make sure you’re selling to the right buyer, one who is likely to repay the loan you’re extending.

And if you do go with seller financing, remember to check on your property. You don’t want the deal to go sideways and after foreclosing, discover the house needs extensive repairs before you can sell it again.

If you’re thinking about seller financing, work with a top agent

There are fantastic HomeLight agents who count seller financing as one of their specialties.

When you’re looking for the right agent for you, make sure they know you are ready to offer seller financing so they can proactively share that with potential buyers.

Give your agent your terms for seller financing, the details of what you are willing and able to do to work with a buyer. The listing needs to say “seller financing available,” “owner will carry,” “owc,” “flexible terms,” “motivated seller,” or “wrap” (for a mortgage “wrapped” around another).

If you see these terms in other listings in your area, you will have a much clearer sense of what the “competition” is up to, which may help you decide if the risks are worth choosing seller financing for yourself!

Considering Seller Financing? Work with a Top Agent

Top agents can help sell you house faster and for more money, and the most experienced agents have seen it all. Work with a top agent if you’re considering offering seller financing to help attract buyers.

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Working. Shopping. Eating out. Getting gas. You pay taxes on so many things, it makes sense to want a break on paying taxes when selling your biggest asset: your home.

You’ve come to the right place if you’re wondering how to avoid paying taxes when selling a house. We’ve talked to a top real estate agent and a tax professional to help you understand the required home sale taxes and gathered the top ways to mitigate or eliminate the tax burden on your home sale.

Capital gains in real estate, explained

If you sell your house for more than you bought it for, you’re making a profit. The government considers that profit taxable in the form of capital gains. Just be aware that capital gains tax is calculated based on the gross profit, not the net.

Experienced CPA Robin F. Sansone, partner at Georgia-based Rhodes, Young, Black & Duncan, explains:

“If you sell your home for $200,000 and $50,000 of that sales price is used to pay off the existing mortgage and another $20,000 is used for closing costs, you may only receive cash of $130,000 at closing. However, you calculate your gain based upon the $200,000 sales price, NOT the cash received of $130,000.”

How the IRS decides to tax the capital gains from your home sale is based on whether or not your capital gains are long term or short term. This separates the average homeowner (who’s selling a house for reasons like upgrading, downsizing, or relocating) from the investor (who is buying and selling a number of homes annually for a profit — which qualifies the home sale proceeds as ordinary income).

Long term capital gains tax rates are typically 15% for the average individual, but can be as low as 0% or as high as 20%, depending on your income. These long term rates are generally lower than the standard income tax rates. And of course, only the gain (the amount you sold your house for above the amount you bought your house for) is taxed.

Short term capital gains are taxed as ordinary income, so the rate varies based on your annual income.

The opportunities available for lowering or avoiding taxes on your home sale depend on whether or not you’re a homeowner selling a primary residence (plus factors like how long you’ve lived there) or an investor selling an investment property.

How to avoid taxes on your primary residence

Fortunately, most home sellers won’t be taxed on every single dollar of profit made from their home sale. That’s because most primary residence sellers meet the guidelines to qualify for the capital gains tax exemption.

Thanks to the Taxpayer Relief Act of 1997, most home sellers qualify for the Section 121 exclusion that exempts home sale profits from capital gains taxes. Wenatchee, Washington-based real estate agent Perrin Cornell explains:

“When selling a residence, a single homeowner gets a $250,000 capital gains tax exemption and a couple gets a $500,000 exemption. For example, if a single person with a $100,000 mortgage sells a home worth $300,000, they have a capital gain of $200,000. With that $250,000 exemption, they’ll have no taxable gain at all.”

This exemption isn’t automatic, though. You’ll have to qualify based on two tests — ownership and use. According to the IRS, you must:

1. Own the home and live in it as your primary residence for at least two non-consecutive years out of the five-year period prior to the date of sale.

CPA Sansone recalls a client who qualified for this exemption even though the home she was selling was no longer her primary residence:

“I had a client who is single and living in Georgia. While her kids were in college in Georgia, she moved to a home in Florida, but kept the Georgia home for her kids to live in while in school. After two years, she decided to sell the Georgia home. Even though she no longer lived in the home, she had lived there for at least two of the previous five years. Therefore, she was allowed to take the $250,000 exclusion on the sale.”

2. Wait at least two years before claiming the exemption between sales of a primary residence.

You can’t always get this exemption just because you are selling your primary residence. This exemption is only allowable once every two years. If you claimed it for another property the 24 months preceding your current sale, you won’t be able to do so on a second property to avoid capital gains.

And expect the IRS to be unforgiving about the two-year minimum: “[Another] client owned their property for one year, nine months and three weeks, so he couldn’t get the capital gains tax exemption,” recalls Cornell.

3. Reduce your capital gain by deducting the cost of capital improvements made to your home from the proceeds of the home sale.

In order for a home improvement to qualify as a capital improvement, it must meet these three qualifications:

• It substantially increases the value of the real property (e.g. installing new kitchen cabinets or building a deck), or appreciably prolongs the useful life of the real property (e.g. replacing the water heater or HVAC).
• It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself.
• It is a permanent installation/improvement. (For example a temporary, above-ground pool, versus a permanent in-ground pool.)

CPA Sansone explains:

“As you make home improvements over the years, keep a record. We accountants love spreadsheets and that would be the easiest way to keep track of those improvements, like a new HVAC system, a new roof, new flooring, etc.

“These items are an integral part of the home that are usually not removed from the property when you sell. Please note that I do not mean that you keep track of every time you paint your home or clean the windows. These are normal expenses of home ownership.”

Basically, if you’re replacing any major item in the home and that increases your home’s value, that is a capital improvement. But if you’re repairing or improving the condition of existing elements in the home, it’s not a capital improvement.

So, items that won’t qualify as capital improvements include things like repainting, driveway sealing, appliance repairs, and so forth.

NOTE: There are two exceptions that make you ineligible for this capital gains tax exemption altogether, even if you meet other qualifications. You are ineligible for the capital gains tax exemption if:

• You acquired the property through a 1031 Exchange (more on these later).
• You’re subject to the expatriation tax (which applies if you renounce your citizenship and move out of the country).

How to avoid taxes on your investment property

Investors who cannot qualify for the capital gains tax exemption still have options to save on taxes when selling an investment property.

As these tax-avoiding arrangements are quite complex, you should enlist the help of a real estate attorney, or real estate savvy tax professional so that you don’t fall victim to all of the red tape.

Use the 1031 exchange

The 1031 exchange is one of the most common tools used by savvy investors to avoid the endless annual cycle of massive taxes on their real estate transactions.

“A 1031 exchange, commonly referred to as a ‘like-kind exchange,’ allows you to exchange one investment property for another without recognizing gain at the time of the exchange. However, you will want to work closely with your accountant to structure the exchange properly to avoid tax,” says CPA Sansone.

You don’t need to be a big time investing corporation to take advantage of a 1031 exchange; even individual investors can defer taxes through an exchange. But your investment properties will need to meet specific requirements. According to the IRS 1031 Fact Sheet:

• “Both properties must be held for use in a trade or business or for investment.” In other words, your primary residence, second home, or vacation home will not qualify for deferred taxes through a 1031, like-kind exchange.
• “Both properties must be similar enough to qualify as ‘like-kind.’ Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.” Basically, this means that you cannot defer capital gains taxes on a property sale and then use your profits to invest in the stock market instead. You must purchase more real estate if you defer taxes in a like-kind exchange.

There are also several rules that you must follow when using a 1031 exchange:

• You must identify up to three properties to purchase through the exchange within 45 days after selling the original property.
• You must also close on a new property within 180 days from the closing date on the sale of the original property.
• You are advised to use a qualified intermediary (QI) when doing an exchange. The QI is a third-party company that holds onto the money for those 45 to 180 days while you arrange the purchase of a new property. You are not allowed to hold onto the money yourself when using a 1031 exchange.

It’s important that you don’t just hire any QI that you come across — you need a reputable one to take charge of all that money, even for this short period of time.

The IRS warns that some QIs have either declared bankruptcy or been otherwise unable to meet their financial obligations, leaving you and your money stuck in a legal and financial mess.

And don’t expect the rules of the 1031 exchange to bend because of your QI troubles. If you fail to meet the 45-day or 180-day requirements, you will be taxed immediately on the proceeds from your investment property sale.

Consider utilizing a charitable remainder trust

Another, lesser-known option to avoid paying taxes on an investment property sale is through a charitable remainder trust (CRT). This option is best suited for retirees who are willing to donate the house to their favorite charity, such as a church or university.

Essentially, a charitable remainder trust lets you donate an investment property to the charity of your choice by putting it into a CRT, which allows the charity to sell the property at a 0% tax rate.

But you’re not just giving the whole house away to the charity.

A CRT offers a lot of benefits, including saving on taxes. With a CRT you can:

• Avoid paying any capital gain taxes on your home sale.
• Generate an income stream for the duration of your life — and even your children’s lives with the proper structuring.
• Diversification of investment assets.
• Potentially avoid hefty estate taxes, (since it’s technically no longer a part of your estate).
• Donate a sizable gift to your favorite charitable organization.

A CRT puts the proceeds of the sale into a trust that invests the money and pays an income out to you for the remainder of your life. You can even write the terms of the trust to pay that investment income to your children after you pass away.

You will also receive a charitable income tax deduction that allows you to reduce your adjusted gross income by up to 30%. That puts even more cash into your wallet.

Agent Cornell explains how it works in more detail:

“Let’s say you want to donate the proceeds of your home sale to your alma mater or a hospital. You would have the house appraised, then transfer it into a taxable exempt trust. The university or hospital then sells the property and pays you a portion of its value annually as income, normally around 5% or up to 10% of its appraised value.

“So, you’ll get a tax deduction for the charitable contribution of let’s say the $200,000 value of the home, plus you’ll get $1,500 a month as income from the trust, which isn’t a bad deal.”

Once all beneficiaries of the trust have passed on, the remaining investment in the trust goes to the charity. So, you’re giving a gift to a charitable organization, and you’re getting a tax deduction on that gift that you can apply against your income taxes for both previous or future years.

Plus, you’ll get that income from the trust for life or for a certain number of years (depending on the terms of the CRT). The only one who really loses out in this arrangement is the IRS.

Make your fixer-upper your primary residence

House flippers usually buy a home, fix it up, and sell it within a 12 month span. But — then you’re going to be on the hook for capital gains. Instead, you could choose to sell or lease your current primary residence, and move into your investment property for at least two years. That gives you plenty of time to spread out the construction costs and repairs timeline.

It also sets you up to take advantage of the capital gains tax exemption on the house you’re flipping so that you won’t lose a large chunk of your profits to the IRS.

Taking a little (or a lot!) back from the IRS

No one minds paying taxes to help fund our country. But when the IRS wants to take a huge bite out of the proceeds (from the sale of a home purchased with income that you’ve already been taxed on), it can feel like overkill.

But with some savvy financial planning, tax expert assistance, and the help of a savvy real estate agent, you can sell your house without giving up too much money to Uncle Sam after all.

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The act of selling a house costs money. So even though you’re the one getting a big check, you’ll also receive a closing statement that lists out all of the charges you owe (how fun, right?) One little fee tacked onto your final settlement is the real estate transfer tax, also known as a deed transfer tax, stamp tax, conveyance tax, or a documentary transfer tax — and it’s not one many sellers instantly recognize.

Ultimately, the purpose of this tax is the same as others: to generate revenue for your state, county, or city (and sometimes all three). “In California, it’s a fact of life,” says Brett Wasserman, an associate attorney who handles real estate law at the legal offices of Marc Bronstein in Santa Monica, California. “When you have cities and states that have lots of services that they provide, they have to raise that revenue somehow.”

First we’ll take a look at this particular line item in your closing costs in the hope that better understanding this fee makes it less mentally taxing. Once you’ve got a firm foundation, consult our comprehensive chart with a list of the transfer tax rates for all 50 states.

What are real estate transfer taxes?

A real estate transfer tax is a fee you pay to a state, county, or municipality for “the privilege of transferring real property within the jurisdiction,” according to Investopedia, a financial information website since 1999.

Depending on where you live, the tax can be a flat fee or an amount specified per every $100, $500, or $1,000 of the transferred property value. (Wasserman describes that as exclusive of any liens.) Arizona charges a flat fee of $2 while West Virginia charges $50, according to MidPoint, a National Title Company based in Cedar Park, Texas.

Most fees range from under a dollar per $100 or $500 to roughly $1 to $3 per $1,000 of the transferred net value. California’s Revenue and Taxation Code charges $1.10 per $1,000 of the transferred net value, or 55 cents per $500, Wasserman says.

Municipalities also have the ability to levy additional transfer taxes. In Los Angeles County, for instance, five cities charge an additional fee: $4.50 per $1,000 for Los Angeles and Culver City; $3 per $1,000 for Santa Monica; $2.20 for Pomona and Redondo Beach.

San Francisco charges varying fees based on the net sale price ranging from 0.5% for property up to $250,000 and 3.0% for property that nets more than $25 million, according to Viva Escrow, an escrow firm in Monrovia, California.

So if you sold a Santa Monica beach property for $2 million, you’d owe $2,200 to Los Angeles County and $6,000 to the City of Santa Monica — a total of $8,200 in what the state calls “documentary transfer tax.”

No wonder your real estate agent needs a calculator handy!

What’s more, some states charge additional transfer taxes based on an area’s population or vary the rate depending on whether the property being transferred is residential or agricultural, MidPoint notes.

Who pays transfer taxes at closing: the buyer or seller?

In the above example, the seller is on the hook for paying real estate transfer tax. But the municipality decides who pays what. Sometimes the buyer pays this tax, sometimes the seller does, and sometimes a buyer and seller split the cost.

In Chicago, Illinois, for example, the buyer pays $7.50 per $1,000 of the net sale while the seller pays $3 per $1,000 — a total of $10 per $1,000 of each sale, according to Craig Fallico, a veteran real estate agent serving the Chicago suburbs. (Illinois Realtors, a trade association that represents the state’s real estate practitioners, has a chart of Illinois real estate transfer taxes listed by municipality, so you can see the variations in just one area.)

Real estate transfer tax is something both parties can negotiate, much like other fees in a real estate transaction, Viva Escrow adds. The county recorder technically doesn’t care who files the fee, as long as it’s paid when the paperwork is filed, the company says.

Do any states NOT charge transfer taxes?

Thirteen states do not impose a real estate transfer tax. They include:

• Alaska
• Idaho
• Indiana
• Louisiana
• Kansas
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Texas
• Utah
• Wyoming

Most of Oregon also has no real estate transfer tax. Only Washington County charges such a tax: $1 per $1,000 when the value of a property sale exceeds $13,999.

Curious to know how transfer taxes work in your state? We’ve pored through all 50 state legislature codes to bring you the exact tax rate that will be applied to your home sale (unless you lucked out in a no-tax state), who’s liable for the tax, and any additional local taxes you should be on the lookout for.

We’ve also pulled up the median home price for a major metro area in each state and did the math to give you a rough estimate of your state tax responsibility. County and municipal taxes vary by area so if you have them and are looking to pin down exact rates, your local Recorder of Deeds website — and your agent — are great places to start.

Are there any exceptions to paying transfer taxes?

There are, although you should check with your real estate agent, a real estate attorney, or a tax professional for specifics related to where you live.

Let’s look at California again as an example. Because California specifies that the sale has to be a “conveyance for value,” any property that doesn’t meet that definition isn’t charged transfer tax, Wasserman says.

So if property changes owners during a marital dissolution, there’s no transfer tax, he says. Property secured as part of a debt or foreclosure? No transfer tax.

Property transferred into a trust? No transfer tax. Other situations where the transfer tax doesn’t apply include property that spouses own 50-50 that they want to transfer into an LLC. “The proportional interest remains the same,” Wasserman says.

Property given as a gift in California also is not subject to transfer tax, he says.

However, some states charge estate or inheritance taxes in this situation. Iowa, Nebraska, Kentucky, and Pennsylvania charge inheritance taxes; Maryland and New Jersey charge both estate and inheritance taxes, meaning the recipient and the deceased’s estate each pay a fee, Investopedia says. That’s why it’s important to consult with a local expert about your tax laws.

So, a real estate transfer tax is just a processing fee?

In some areas, real estate transfer tax is considered a fee for processing the transfer paperwork, even though “you don’t need to pay $1,000 or $2,000 to put a stamp on the property,” Fallico says. “It’s what you do for closing. It’s what you pay, just like you pay interest on a loan.”

Some municipalities require a “point of sale” or occupancy inspection in addition to the home inspection, so the payer feels like they’re receiving something in exchange for the tax, Fallico says. “An inspector comes out and looks at the electrical, looks at the plumbing, makes sure that you didn’t do additions to the property and are paying your fair share of taxes.”

However, some municipalities also add on processing fees. In Santa Monica, the county recorder’s office charges a recording fee of about $28 for the first page and roughly $7 per page thereafter, Wasserman says.

The District of Columbia has a deed recordation tax of 1.45% or 1.1% for values up to $400,000, as well as a deed transfer tax of the same amount.

Are transfer taxes tax-deductible?

Unlike property taxes, which you can deduct up to $10,000, you cannot deduct transfer taxes or stamp taxes on the sale of a personal home, according to the Internal Revenue Service. If you’re a buyer and pay them, they’re included in the cost basis of the property. If you’re the seller and pay them, they’re expenses of the sale and “reduce the amount realized on the sale,” the IRS says.

Criticisms of the transfer tax

The National Association of Realtors (NAR) historically has opposed real estate transfer taxes, calling them a “major burden to buyers and sellers.”

The NAR says these taxes are “volatile” in nature, making them a poor revenue source for municipalities. The association also says real estate transfer taxes reduce housing opportunities overall and place an added burden on low-income families and those who move often.

NAR has proposed exempting first-time homebuyers and those from low- and moderate-income households from transfer taxes.

New Jersey has reduced transfer tax rates for sellers of low- and moderate-income housing who are senior citizens, blind, or have disabilities. This reduced rate ranges from 50 cents to $3.40 per $500, MidPoint says.

The District of Columbia reduces its deed recordation tax for first-time homebuyers to 0.725% for values up to $400,000; they still must pay a deed transfer tax of 1.45% or 1.1% for values up to $400,000.

Real estate transfer taxes are but one slice of the fees and costs associated with selling your home from start to finish. (HomeLight has a handy Net Proceeds Calculator that breaks down all these fees, so you can estimate your final payout.)

Talk with your real estate agent, a tax professional, or an attorney about any exemptions to transfer taxes relevant to your situation, so they can answer all your questions before it’s time to sign on the dotted line.

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You’ve just sold your home for a profit — way to go! — and now perhaps you find yourself wondering what happens next, especially when tax time comes around. Maybe you’re already sitting down to work on taxes, and you’re worried about how much that profit you made last year will end up costing you. Or maybe you’re just pondering selling because you know you could make a great profit in this market, but you’re curious about how complicated that would make taxes.

Wherever you are in your home-selling or tax-prep journey at the moment, we’ll review how your taxes may be impacted by selling your home for a profit. We’ll discuss the capital gains tax, how you may be excluded from it, and what may be different for you if you’re selling an inherited property or relocating for the military. Lastly, we’ll point you to some forms and key resources to help along the way.

Capital gains tax implications of selling a home

The biggest question at tax time for someone who recently sold a home is whether they’ll have to pay federal capital gains taxes on the profit. In short, capital gains are the amount of money you make from selling capital assets — property like homes, cars, investments, and other high-value items.

Between 2020 and 2022, home prices rose dramatically. In Q1 of 2020, the median home sale price in the United States was $329,000. By Q3 2022, it was $454,900. Therefore, many homeowners looking to sell in 2023 will have experienced significant capital gains since their home purchase, especially if they’ve owned their home for more than three years.

For insight into capital gains taxes for home sellers, we consulted Logan Allec, a CPA and founder of tax relief company Choice Tax Relief and personal finance blog Money Done Right. According to Allec, if you sold a home last year, you may receive a 1099-S in the mail from the escrow company. “The thing to keep in mind is that the number on that 1099-S is not necessarily taxable,” Allec adds. “For one thing, the amount on that form is the gross proceeds, not net proceeds.”

Calculating basis

To calculate net proceeds, Allec says people must take time to calculate the basis of their home. Basis is tax-speak for what your home has cost you, and despite what you might think, it’s not just the purchase price. “Your basis is probably actually more than that,” Allec cautions. “Escrow fees, recording fees, appraisal fees — all that stuff, you can add to your basis in your home.” In other words, make sure you account for all the costs associated with selling your home when you’re calculating net profit.

You should also take into account the costs of major or “capital” improvements you made to your home, but keep in mind that simple repairs and maintenance don’t necessarily increase the basis. Allec says, “If something broke in your home — like some fixture or something — and you’re just returning it to its original condition, you can’t count that. But let’s say you add a whole new bedroom — that adds to your basis.”

For examples of more improvements that add to your home’s basis, check out page 9 of IRS Publication 523.

Calculating proceeds

Another way to make sure you don’t overestimate your profit from the home sale is to take into account all the selling expenses, as well. Make sure you subtract from your net profit things like the real estate broker’s commission and any other closing costs you paid.

Example calculation

Let’s look at the impact of calculating gross vs. net profit in a hypothetical example:

• You paid $350,000 for your home 10 years ago and paid $10,000 in closing costs.
• Five years ago, you spent $20,000 to construct an addition onto the house.
• Now, you sold your home for $500,000, with $40,000 in closing costs.
• If you only calculate gross profit (selling price minus the purchase price 10 years ago), you gained $150,000.
• Accounting for your buying costs 10 years ago, plus the capital improvements you made, your basis in the house is $380,000.
• To calculate net profit, you would subtract that $380,000 from the $500,000 sales price, then also subtract your $40,000 in selling costs. That leaves you with a net taxable gain on the sale of $80,000 — compared with a gross profit of $150,000.

As you can see, taking the time to make these calculations can make a significant difference.

Capital gains exclusions

Fortunately, many home sales qualify for the Exclusion of Gain exemption. This means that when certain conditions are met, sellers can exclude up to $250,000 (for a single person) or $500,000 (married, filing jointly) of their profit from a home sale.

Let’s take a look at when the exclusion does and does not apply.

When does the exclusion apply?

There are three conditions that must be met in order to use the $250,000 or $500,000 exclusion to avoid paying any capital gains taxes on the sale of a home:

1. Ownership test. You need to have owned the home for at least 2 of the last 5 years.
2. Use (or residency) test. You must have lived in the house as your primary residence for a total of at least 2 of the last 5 years, even if those 2 years were not continuous.
3. Timing (or look-back) test. You must not have already taken advantage of this tax exclusion for another home in the last 2 years.

To qualify for the $500,000 exclusion:

• You must be married.
• You must file your taxes as married-filing-jointly.
• At least one spouse has to pass the ownership test.
• Both spouses must pass the use test.

When does the exclusion not apply?

Capital gains tax exclusion cannot apply when:

• Selling a second home (whether a personal vacation property or rental)
• You’ve lived in the home for less than 2 of the last 5 years
• You acquired the property through what is called a “like-kind exchange” in the past 5 years
• You are subject to the expatriate tax

Whether or not the exclusion applies to you, here are more tips for offsetting the capital gains on your home sale.

What about special circumstances?

Even if you don’t pass the ownership and use tests, you may still qualify for the exclusion or a partial exclusion under certain special circumstances, such as:

• Divorce or a separation agreement
• Death of a spouse
• Job change
• Certain extended duties away from the home as a result of serving in the uniformed services (more on this below), foreign service, or intelligence services

Sometimes even unexpected health or family changes can justify a partial exclusion. Allec recounts, “One client already had three children, and then they had triplets, and we argued that their home was too small. We got a proration for that, and it was not challenged by the IRS.”

For more on special circumstances, you can check out TurboTax’s guide and also consult the IRS guide directly.

Note: Maybe you’re going through a divorce and haven’t actually sold your home yet — you’re just trying to wrap your mind around the tax implications. Check out these tips from real estate agents specializing in divorce and this discussion of whether to sell before or after a divorce.

Selling an inherited property

What happens if you’re selling a property that you inherited?

• Thankfully, there are no federal inheritance taxes requiring you to pay on an inherited property at the time it becomes yours. (Note that, according to SmartAsset, there are six states with inheritance taxes.)
• When you go to sell the inherited property, however, you will be subject to capital gains taxes based on the amount that the inherited property has increased in value since it became yours.
• The IRS uses what’s called a “stepped-up basis” to calculate capital gains on the sale of an inherited property, which ultimately helps reduce your taxes.
• So, for example, if you inherit a house that was worth $200,000 when you acquired it, and 5 years later, you sell it for $300,000, you could pay capital gains taxes on $100,000 of that sale.

Note: Receiving a house as a gift is very different for tax purposes than receiving one as an inheritance, Allec says: “Your basis in the home is generally the same as the person’s who gifted it to you was.”

Relocating for the military

There are some special rules for the armed forces.

Capital gains exclusion for the military

The IRS outlines some different situations in which members of the armed forces can still receive full or partial exclusion even when they don’t fully “pass” all the tests:

• As a starting point, the same rules about the capital gains on the home sale apply — excluding $250,000 or $500,000 of gain from selling a primary residence that passes the usual tests we’ve already discussed.
• However, if you’re relocated to a new permanent duty station — preventing you from passing the ownership and use tests — you can still qualify for a reduced exclusion.
• You may also be eligible to “stop the clock” — or, more technically, choose to “suspend” the 5-year “test period” that would normally be used to evaluate whether a house has been your primary residence. This may apply to you if you have been on “qualified official extended duty” preventing you from living in the house for 2 years within the last 5 years.

For an example of how a suspension plays out and more details about capital gains taxes for armed service members, check out pages 18 and 19 of the IRS Armed Forces’ Tax Guide.

Writing off moving expenses

Capital gains aside for a moment, there may be a bonus for members of the armed forces. If you’re selling your home because you’ve been permanently relocated due to a military order, a significant portion of your moving costs may be tax-deductible.

According to IRS Publication 3, you can deduct:

• Transportation and storage of household goods and personal items
• Travel from your old home to your new home (including lodging, to an extent)

Take note, however, that food will not be deductible.

State and local taxes

Most states also tax capital gains. Currently only 8 states do not tax capital gains:

• Alaska
• Florida
• New Hampshire
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming

While specific rules vary, if you live elsewhere in the US, the profit on your home sale may be taxable at the state level. You can check your state’s capital gains tax rate here.

If you sold your home in a high-tax state like California or New York and are also in a high tax bracket, says Allec, “you probably want to talk to a professional” to help you file. A tax professional may be able to help you mitigate your tax burden, plus take into account any local taxes that may apply, as well.

More forms and resources

• For a starting point on what documents you’ll need for filing taxes after selling a house, we’ve got you covered.
• If you receive a 1099-S in the mail, you must report the sale of your home to the IRS — even if you qualify for full exclusion of gains. You’ll need to complete Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and other Dispositions of Capital Assets.
• If you’re a member of the armed forces moving because of reassignment and writing off moving expenses, use Form 3909. And the IRS Armed Forces’ Tax Guide contains all the official details.
• For more detailed information from the IRS about selling your home, refer to IRS Publication 523.

When to talk to a professional about property-related taxes

“If you’re selling a home and you clearly don’t qualify for that home sale exclusion,” recommends Allec, it’s probably a good idea to reach out for help.” Or, depending on your specific situation, you might have more questions.

Rather than talking to your real estate agent, it’s a good idea to go to an accountant or attorney with specific questions, including:

• Questions about estate taxes or what will happen if/when the property owner dies (in this case, you’d talk to an estate planning attorney instead of a tax attorney)
• How to structure the ownership of the property — perhaps you want to put it in the name of an estate, trust or company, as opposed to your personal name
• Buying a property in the US, when you aren’t a US resident or citizen

Your real estate agent may be able to refer you to the appropriate professional to help navigate the tax implications of selling a home, depending on your specific scenario and questions. Don’t have an agent? We’d love to help you find one.

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Furthermore, despite rising interest rates and slowing home sales, home values have remained high, meaning the homeowners in the US still hold much of the equity gains made during the hot 2021-2022 market.

Having higher equity opens up homeowners to options that allow them to leverage their stake in their home for other ends.

For example: Should you get a home equity loan to pay for a much-needed vacation or your postponed dream wedding? What about tapping into those funds to pay for your basement remodel or to consolidate other debts?

Perhaps you’re looking to buy a home soon and want to know more about how to put your existing equity toward a new and spacious abode.

There’s quite a bit you should know about home equity, especially if you plan to borrow from it. Let’s take a look at what home equity is, how it grows over time, and why it’s so important to use it wisely.

What is home equity in simple terms?

Home equity is a homeowner’s financial stake in their property that they own free of their mortgage loan obligation. It’s calculated by taking the current value of your home minus your principal balance and the total of any additional liens that must be paid off before selling the property.

Current property value
–
Balance of remaining mortgage(s) and unpaid liens
=
Home equity

These added liens could be in the form of a second mortgage, outstanding property taxes, or child support owed. But if you don’t have any additional liens to account for, simply take your home value minus your unpaid principal to estimate your home equity.

How much equity do I have in my home?

To calculate your home equity, you need the following:

• Your current home value
• The amount of your unpaid principal

Let’s break down how to obtain estimates of each figure.

What’s your home worth?

There are a few ways to find out what your home is worth today:

Online tool

Our Home Value Estimator combs public data including tax records and assessments and pulls recent sales records for other properties in your neighborhood. Using a short questionnaire, we also factor in specifics about your home such as the property type and described condition.

Input your address, and we’ll provide you with a preliminary home value estimate in under two minutes. Although it’s not a guarantee of what your home will appraise for, an online home value estimator is a helpful starting point in your quest to determine how much equity you have.

Get an Estimate on Your Home's Value

If you’re not sure of your home’s current value, HomeLight’s Home Value Estimator uses your property information and local housing market data to deliver an accurate home value to help you calculate your current equity.

Get Estimate

Local real estate agent

For a more precise calculation of your home’s worth, ask a real estate agent to provide you with a comparative market analysis (CMA), which uses comparable sales as a benchmark for your property value and then makes dollar adjustments based on competitive differences. Agents typically perform a CMA when they list a home, but may be willing to help you even if you aren’t selling right away.

Appraisal

A lender is typically going to require a professional home appraisal if you want to use a home equity loan, though methods like drive-by valuations or automated valuations models have become more common. Contact your lender for details about what your loan requires.

How much do you still owe?

The best way to determine how much you still owe on your mortgage is through your loan servicer. Many lenders today provide online tools to access the most recent details about your mortgage, including your payment history and copies of your monthly mortgage statement, in a secure online portal.

Look for a callout like “unpaid principal” which may be located next to instructions for getting an official payoff quote, which is the total amount of principal and interest you must pay to satisfy your loan obligation. After subtracting this from your home value, you’ll have the amount of equity you currently own in your home.

Does interest count towards equity?

Your home equity builds as you pay down the mortgage principal and as property values rise. But keep in mind: The money you pay toward mortgage interest doesn’t count toward your equity.

As you make mortgage payments every month, some of that payment goes toward your principal balance and some of it goes toward interest.

During the early days of paying your mortgage, that monthly payment covers just a small amount of principal (and is weighted heavily toward paying interest). But the slice that goes toward the principal gets bigger and bigger as you progress through the loan amortization schedule.

You can get an idea of how much of your monthly mortgage goes toward interest versus principal by looking at the amortization schedule for your loan, which the lender is required to provide a copy of when you take out a mortgage.

If you don’t have that copy handy, another option is to use an online amortization calculator for an estimate of how much you’ll pay in interest over the life of the loan and how it will change as you gradually reduce your debt.

Easy home equity example

Let’s say you bought a home in the Tampa/St. Petersburg/Clearwater, Florida area in August 2012 for $350,000. After a 20% down payment (or $70,000), your principal balance would be $280,000. At that point you have $70,000 in equity, the equivalent of your down payment.

For the next 10 years, say you make mortgage payments of approximately $1,257 a month for a 30-year fixed mortgage with an interest rate of 3.5%.

If the house were still worth $350,000 in August 2022, your estimated equity would be about $133,000 by paying down your mortgage balance alone and not accounting for price growth, according to an online mortgage calculator from HSH, a consumer mortgage resource since 1979.

Adjusting for current home appreciation, HSH estimates that the same home is now worth about $1,047,000, putting your current estimated equity at about $830,000. This example illustrates why Eli Joseph, a top-selling real estate agent in Hartford County, Connecticut, is passionate that “equity is a key, key, key component in building wealth.”

How equity builds over time

While building equity in your home doesn’t happen overnight, equity can grow in several ways. Here are some of the main factors that drive home equity.

When you make a down payment

Since equity is the portion of the property you own, free of financing, your down payment is considered equity. In our example above, a 20% initial down payment means you own 20% of the house at the time of purchase.

Naturally, the larger your down payment, the more equity you gain at the start, but you’ll have to weigh that against how much you can comfortably afford to put toward the purchase. A 15% or 10% down payment still earns you a chunk of ownership, but will typically require the extra cost of private mortgage insurance (PMI) if you took out a conventional loan.

When you make mortgage payments

For many borrowers, paying off a mortgage is a 15- or 30-year process. But it’s nice to think as you make those payments about the wealth that you’re accumulating each month. Homeowners who opt for 15-year mortgages tend to build equity faster because they typically make higher monthly payments and have lower interest rates.

Regardless of the type of loan you have, you can increase your equity faster by increasing your monthly payment and designating that those extra funds be applied to principal. On a fixed-rate loan, this also reduces the amount of total interest you’ll pay, since interest is calculated against the principal balance.

When property values rise

Property values historically appreciate over time, and one of the top advantages of homeownership is getting to build wealth through the upswings of the housing market.

Real estate is typically a safe investment, but there have been exceptions and bad moments. When there’s a high supply of housing and a low number of buyers, real property values can remain stagnant or decrease, such as dropping just 7% during the recession of 1989-1991 and 33% during the Great Recession.

Lately, however, values have been going up. The median sales price of existing single-family homes rose about 5% from 2018 to 2019, according to the National Association of Realtors® (NAR). It climbed about 9% from $274,600 in 2019 to $300,200 early in 2020, NAR statistics show, and has risen sharply since, thanks in part to a lower supply of available housing and high buyer demand. As of Q3 2022, it was just over $450,000.

When you add value through renovations

Most home renovations won’t recoup their cost dollar for dollar, but many do add significant resale value and taken together, can help a house stay current against new construction and upgrades going into neighboring homes. Generally upgrades that increase square footage or modernize a home are some of the best investments you can make. Examples may include:

• Finish the basement, which costs about $18,000 on average but recoups up to 70% of the cost at resale.
• Replace your existing entry door with a steel one, which costs about $200 to $400 and recovers up to 91% at resale.
• Replacing your garage door for about $200, recouping about 95% of your costs at resale.
• Do a minor kitchen remodel for about $21,000, replacing cabinet fronts and hardware, which recovers about 77% at resale.

Joseph, our top agent in Connecticut, says in his area, remodeling a kitchen or finishing a basement add tremendous value.

His mother finished the basement in her ranch home earlier this year and added a bathroom. Because of current home values and mortgage rates, she refinanced her mortgage, got rid of her PMI, and reduced her monthly mortgage payment by more than $200.

“Her home value increased and her mortgage payment decreased because she had more than 25% equity,” he says. “She can always sell at any time at a higher price than she bought.”

In the meantime, she’s enjoying her new space. “She just had a birthday party down there and invited a lot of friends over.”

Options for using your home equity

Building equity gives homeowners the peace of mind and stability that renters often don’t have, Joseph says. Here are a few ways to use that wealth.

1. Sell your home and buy a new one

How much equity you should have before selling depends on your next move. Danny Freeman, a top-selling real estate agent in Memphis, Tennessee, suggests having 10% in equity if you’re simply relocating and a minimum of 15% if you want a larger home. “The more, the better,” because your sale price needs to pay off the existing mortgage, cover closing costs, and handle at least a portion of the down payment on a new home.

Ideally, you should have enough equity to cover all taxes (local, state, and federal), as well as attorneys’ fees, moving expenses, and any other costs you don’t want to pay out of pocket, Joseph adds.

2. Do a cash-out refinance of your current mortgage

With a cash-out refinance, you can tap into your equity and refinance your home with a larger mortgage, and the lender will advance you that additional amount in cash, which you can put toward remodeling costs or other expenses or to pay off higher interest debt such as credit cards and car loans. Most lenders will limit your cash-out loan amount to 80% of your home’s value.

What’s nice about this route is that a cash-out refinance is a standard first mortgage loan, not a secondary lien or line of credit, allowing you to take advantage of lower interest rates.

3. Use it toward your retirement

The most straightforward way to use your home equity for retirement is to downsize from your home and invest the proceeds, reducing your expenses (and again building equity with another mortgage). Reverse home mortgages can help supplement your retirement income while tapping into your existing home equity, but this option can make it difficult to leave your home to your children, among other risks.

4. Fund your next renovation project, consolidate debt, or pay for education

Using a home equity loan or home equity line of credit (HELOC), you can borrow money using the equity in your house as collateral for a number of expenses, including debt consolidation, tuition, renovation projects, or even a down payment on another property.

However, keep in mind that interest will only be tax-deductible if the borrowed funds are used to “buy, build, or substantially improve the taxpayer’s home that secures the loan,” according to IRS Publication 936.

Typically, you’ll need at least 10% equity in your primary home (or 20% in an investment property or second home) to qualify for a HELOC, but be careful how you spend the money. You’ll have to pay back whatever you borrow, plus interest, for this option.

The risks of dipping into your home equity

While it’s tempting to use your home equity to pay for home renovations, repairs, and other expenses, you could lose your home if you don’t repay what you’ve borrowed.

People unfortunately borrow against their house and then can’t pay it back, which makes it harder for them to sell. “A lot of people misuse the money,” Joseph says. “I know a lot of investors who do that — buy a house, refinance, buy another house … but it’s not necessarily the best route to go. Or using the money for just anything — a car, for example.”

Even without borrowing against your home equity, a homeowner can wind up with “negative equity,” or owing more on the mortgage than your home is worth. People also refer to this as being “upside down” or “underwater” in their mortgage, and this can occur because of an increase in mortgage debt or a decline in home value.

If you’re considering tapping into home equity to pay off debt or expenses not associated with purchasing another property, Joseph suggests finding other ways to come up with the money or taking out a smaller amount. Having a temporary job or taking out another type of loan that addresses these expenses offers more stability than borrowing against your house.

Home equity: the long game

It’s exciting to build wealth through homeownership, but remember that owning a house over time gives you the best chance of riding out any market fluctuations and covering inevitable selling expenses so you can reap the greatest rewards.

“Real estate is a long game. It definitely, definitely pays off,” Joseph says. “Five years goes by very fast. Even 15 or 20 years. Having a house and building equity over those years, even if you just own one property, can change someone’s life.”

Header Image Source: (Alexander Wark / Unsplash)

Dealing with debt is always difficult, and when it gets to the point that you have a lien against your house for something as serious as unpaid taxes, it’s hard not to feel the walls crashing in.

But there is hope yet.

Too often homeowners forget that they’re living in their most valuable asset — their home — and that selling this asset may be the best way out from under the specter of lien.

Whether you’re dealing with unpaid child support, outstanding income taxes, or property taxes owed to your local county treasurer, it’s time to face the music head on so that this tax lien doesn’t hang over you any longer or further compound with penalties and interest.

Consult this guide where we’ll start with the basics (what exactly is a tax lien?), lay out in plain terms how a tax lien impacts your ability to sell your home, and explain what your options are for moving forward — from satisfying the delinquent tax to disputing its legitimacy.

What is a tax lien on a home?

A tax lien is essentially a debt claim against your assets, your biggest one being your house. This means that you cannot sell your house and pocket any equity from the sale until that tax lien debt is satisfied.

There are three main types of tax liens:

• Property Tax Liens – These liens are placed on your house for unpaid property taxes that are due to the county or city.
• State Tax Liens – These liens are placed on the property for back taxes due to your state’s Department of Revenue (DOR).
• Federal Tax Liens – These liens are placed on your home as a result of unpaid income taxes owed to the IRS.

In most cases, you’ll be dealing with the government to resolve the tax lien, but sometimes private entities become involved, such as with a property tax lien.

Your city or county can create a tax lien certificate that can be sold to outside investors. If you fail to pay off the lien, and the additional penalties and interest, that private investor can then foreclose on your home as a repayment of the debt.

The upside is that a private investor may be flexible and willing to compromise on the payment timeline or the amount owed. Government entities are less likely to be flexible, and both your state’s department of revenue and the IRS are willing and able to foreclose on your home, too, if their tax liens aren’t paid in full.

Why is my tax lien higher than the taxes owed?

Just like any other debt owed, when you have unpaid taxes, the government is going to charge you interest and penalties when you don’t pay up on time. And sometimes that failure-to-pay penalty can be as high as 100% of your tax debt — which can be the case with unpaid employment taxes.

Wenatchee, Washington-based real estate agent J. Perrin Cornell provides the following example:

“Let’s say you have a $5,000 lien on your property for unpaid employment taxes. If you incur that 100% penalty, then you’re up to $10,000 plus 12% interest per month. And if you let that lien sit on your property unaddressed for several years, then suddenly your $5,000 nonpayment of taxes is a debt of $20,000 or more.”

As that tax debt piles up, it’ll swiftly eclipse any equity that you’ve built up in your home.

You won’t have that same 100% penalty on all liens, but expect some kind of “late fees” to apply to various unpaid taxes. For income taxes, the federal government charges the following penalty:

“One-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.”

Failure to file can also incur penalties of between 5% and 25% of the unpaid tax per month. After 60 days, you’ll face another late-filing penalty — either $450 or 100% of the tax owed, whichever is less.

That’s why it’s vital to get your lien situation sorted out as soon as possible.

If selling your home is the only way to clear your tax lien (meaning, you can’t clear the lien with out-of-pocket cash from savings), then put it on the market as soon as possible so that ongoing penalties and interest don’t shrink your equity down to nothing.

It can take more time than you’d think to clear a tax lien.

“We don’t want to wait until you’ve gotten an offer, we need to start working on your lien as soon as possible because it can take a lot of time to resolve. I have one that started in November of 2017, and we finally got it cleared in August of 2018,” recalls Cornell.

How is a tax lien discoverable?

Whether out of embarrassment or denial, many homeowners hold out hope that their tax lien problem won’t crop up until after the home sale closes.

Unfortunately, you can’t hide under a rock forever when it comes to taxes.

Tax liens are discoverable during a title search — even if the lien data isn’t an exact match.

“Tax liens will be discovered during a title examination. In Georgia, the liens can be found in the Georgia Property Records Search. The parties’ names are searched under the lien index in the county in which the property lies,” explains Sarah Stitgen, an Atlanta-based closing attorney for Cook & James.

“Often you will find liens that are not an exact match of the name and those will need to be further investigated. For example, the home seller may be Sarah Lee Smith, and tax liens may pull up with just Sarah Smith, or Sarah L. Smith. Some liens will provide the last 4 digits of SSN and can be verified with that information.”

One of the biggest mistakes you can make as a homeowner is failing to tell your real estate agent about the lien. Honestly, an experienced agent is your best ally when facing a tax lien while trying to sell your house.

“If your lien situation is simple and for a low dollar amount, you can probably resolve it with the help of your agent and a title company. But if you have a complex lien situation, you need to work through it with a qualified tax attorney or tax advisor as soon as possible,” advises Cornell.

What are my options for selling a house with a tax lien?

When you sell a house that has a tax lien on it, that doesn’t mean you’re transferring the lien with the house to the buyer. That tax debt is yours and you’ll need to deal with it before the sale can close.

Let’s take a look at your options for dealing with your tax lien.

1. Dispute the tax lien with the IRS (or other government entity)

If the tax debt that triggered the lien against your house is not yours, or you’ve already paid the lien off, then disputing the tax lien is the smart play.

But disputing a tax debt is rarely easy.

“The IRS doesn’t go away, and dealing with them comes with a lot of issues. For example, they’ll only communicate with you by letters or telephone, not email,” explains Cornell.

(Warning: If you do get an email supposedly from the IRS saying there’s a tax lien on your house, don’t engage — as it’s almost certainly a scam.)

In fact, the IRS may not even deal with you until you’ve brought in a qualified tax advisor. They don’t have to talk to your real estate agent, or the title company. They only have to talk to your tax advisor, so you need to appoint one ASAP.

For example, let’s say your tax lien was filed in error.

The IRS will withdraw the federal tax lien, but you’ll need your tax attorney to request an appeal, and you’ll need evidence to back up your claim — such as proof that the tax debt was incurred by someone else with a similar name.

If you have proof that the taxes were already paid off, but the lien is still on your house after 30 days, you may need to file a request for a certificate of release before your home sale can close.

2. Request a certificate of discharge

Another option is to request a certificate of discharge from the IRS.

“Federal tax liens need to be satisfied via payment; however, there are circumstances in which the IRS will grant a partial release for the particular property, or there may be an opportunity to obtain a certificate of discharge which will release the property but not the lien itself,” advises Stitgen.

The certificate of discharge detaches the lien from your house so that it can be sold, but it does not absolve you from the tax debt. You must still pay those back taxes to the IRS, and other personal property or assets can be seized to satisfy the tax lien.

3. Satisfy the delinquent tax

If you know you owe those taxes to the city, state, or IRS, then you’ll need to satisfy that delinquent debt before you can sell your home. For home sellers who don’t have the cash to pay it off in their savings, you may have other financing options.

“It may be possible to pay off your lien with a HELOC (home equity line of credit) before you sell the house, if you’ve got a lot of equity built up,” explains Cornell.

“But you cannot wait to use equity from the completed home sale to pay it off. Closing is too late to deal with a lien, you have to do it early on.”

In other words, you simply cannot leave the lien unaddressed until closing — even if you plan to pay it off with the proceeds — or your home sale will not close. However, you can wait to pay off the lien until closing if you make arrangements to do so.

4. Pay off the lien amount at closing

“The home seller has an option to pay the tax lien off on their own prior to the closing, but they will be responsible for obtaining a lien release from the IRS and presenting that prior to closing,” explains Stitgen.

“This can be time consuming and hold up the closing. The more common option is for the lien to be paid at the closing with proceeds from the sale.”

The closing attorney will submit the funds from the closing to ensure satisfaction of the lien.

Let’s say that Jane and John Doe have a mortgage on their home that stands at a balance of $140,000. They can sell their home for $200,000 but there’s a Federal Tax Lien of $22,000. Your tax attorney can arrange for that $22,000 to be paid out of the proceeds of the home sale at the time of closing.

What happens is this: your law firm remits payment to the IRS for the full amount, and the IRS files a release of the lien. Once that tax lien and the mortgage are both paid, the amount due to the home seller at the time of closing would be $38,000 (minus any commissions due to the Realtor and any credits, if any, to the buyer).

5. Wait for the debt to expire (which almost never happens)

If you’ve had that tax lien hanging over your head for close to a decade, then it may be wiser to wait to sell your house until the 10-year statute of limitations period ends. That will free you from the tax lien without paying it off.

But don’t hold your breath waiting for that to happen.

If the dollar amount of your tax lien is low, there is a chance that the IRS will let the debt expire, but in most cases, Uncle Sam will get his money, no matter how long it takes.

What’s more likely to happen is that the IRS will file suit against you for collection.

When the IRS files suit, this reduces the claim against you to judgment — meaning the penalties and interest will stop as your debt amount is locked in by the judgment. However, it also removes that 10-year statute of limitations. That judgment against you remains in place until it is paid in full.

What if the tax lien exceeds what you earn from the sale?

If the proceeds from your home sale are not enough to pay off your mortgage and your tax lien, don’t assume you can satisfy the remaining IRS debt on a payment plan.

“In the event that there will not be enough proceeds to pay the lien, the seller will be required to bring that money to the closing in order to fully satisfy the lien,” explains Stitgen.

“It is not typically an option to convert the remaining debt and make payments to the lien holder. Since tax debts become an automatic lien on the property, it would be highly unlikely they would remove the lien without full satisfaction.”

If you cannot come up with the cash to cover the difference between your home sale proceeds and your debts, then filing for bankruptcy may be your only option.

This won’t clear your tax lien debt, but it will make sure that the IRS gets paid.

“I had a client who both had a lien on her house and she was facing foreclosure, and the IRS would not back off until they got their $17,500. The client couldn’t afford that, so there was no way to solve it through the home sale,” recalls Cornell.

“The house went back to the bank, she filed for bankruptcy and walked away with worse than nothing, because she was now in debt. But the IRS got their $17,500 in the end from the bankruptcy trustee.”

Don’t wait to deal with your tax lien debt

Getting notification of a tax lien on your house can feel like your financial standing has just been destroyed. But don’t let yourself be buried under that tax debt. Denial and procrastination won’t make your tax lien problem go away.

The sooner you deal with a tax lien during the home sale process, the better off you’ll be. And with the assistance of a knowledgeable tax attorney and an experienced real estate agent, you’ll know all your options for selling your house with a tax lien for the best fighting chance at moving on.

Header Image Source: (Greg Rosenke / Unsplash)

It could land you in temporary housing if you haven’t found a house to buy. That means two moves, which is nobody’s idea of a good time.

Or, you could wind up paying two mortgages for a while if you go ahead and buy that dream house before you’ve sold yours.

Each option may have advantages that depend on market conditions. We’ll explain the market’s impact on this decision to sell or buy first, and provide advice from real estate experts such as Joel Barber, a top agent who works with 83% more single-family homes than the average Myrtle Beach, South Carolina, agent, to help you make the right choice.

How Much Is Your Home Worth Now?

When deciding whether to sell first or buy first, it’s helpful to know your home’s value. Our Home Value Estimator tool analyzes the records of recently sold homes near you, your home’s last sale price, and other market trends to provide a preliminary range of value in under two minutes.

Get Estimate

Start by understanding the market

Real estate market conditions will have a significant impact on your decision on whether to sell your house before you purchase another one. It helps to know where the market is now and where it’s headed.

In a buyer’s market

In a buyer’s market, inventory exceeds demand, typically resulting in homes spending more days on market, and thus, resulting in pressure on the seller to reduce the price or offer concessions to incentivize a buyer. In such a market, it’s advisable to list your home first because it probably won’t sell right away. This provides time to look for a new home before you sell the current one.

In a seller’s market

Just the opposite occurs in a seller’s market; there is low inventory and high demand, often coupled with stiff competition. While you’re likely to sell your home quickly – possibly above asking, with few to no contingencies, and possibly a quick close – you may experience difficulty finding the next one. If you wish to avoid a second move into a temporary situation, you might not want to list until you’ve found a new home.

Here’s how to tell what kind of market you’re in:

The COVID-19 pandemic contributed to a strong seller’s market as buyers started seeking larger homes with more outdoor space and reassessing their home destinations with the rise of work-from-home opportunities. Supply chain issues limiting building supplies, as well as a labor shortage further contributed to the housing shortage. In addition, record-low mortgage rates incentivized buyers.

Over the past two years, housing prices set new records as inventory continued to lag behind demand.

The is changing. Home prices are increasing, fed by ongoing labor shortages, along with increases in the cost of materials, mortgage interest rates, and inflation. Most industry analysts are saying buyers can expect a more balanced market in 2023 compared to 2021 and 2022.

Barber says prices remain steady, while inventory and interest rates have increased. This strong market has led to a “change in dialog” between buyers and sellers, he says. “Buyers have more options. They’re not offering over [asking price] and they’re not waiving appraisals.”

After checking the experts’ predictions for the market’s direction, be sure to consult HUD’s Comprehensive Housing Market Analysis for a general overview of market insights on your nearest city. HUD conducts research on more than 100 major U.S. cities, releasing a regional report every two to three years that covers the city’s housing market trends, including the average home sale price, time on the market, the number of homes for sale, and relevant economic factors such as job growth rate, population, and average household income.

Sell your house first

Barber’s question to sellers is: Can you buy a new house without selling yours first?

Selling your home first has some benefits; for example, it lets you know what your budget is for the new home, but it’s a gamble that may see you having to move to temporary digs until you find that new home.

The upsides

• Buying with a set budget: You know exactly what your budget is for purchasing a new home.
•  Financing is simple: You can use the cash from your sale as a sizable down payment.
• Reduced pressure: You can negotiate confidently for the top sale price on your current home.

The downsides

• Living in temporary housing: Like everything else, rent has gone up. Barber says the rental market is stronger than the housing market, with tight inventory allowing rental property owners to name their own price.
• Moving twice: Moving twice is expensive and exhausting, especially if you have to pay to store your furniture.
• Risking the market: Prices in the market could rise, so you might pay more for your new home than you budgeted for.

How to make it work

Transition via rent back

If your home sells before you find one to buy, you can opt for a “rent back,” also known as a sale-leaseback, holdover, or “possession after closing,” in which you rent your home from the new buyer for a specified period of time, usually no more than 60 days. After that, the home is considered an investment property so their loans would carry a 1.25% higher interest rate than a mortgage. This allows the seller to avoid a double move.

Barber says this is the best solution and is a “flip” on the more commonly seen buyer contingency. However, he adds, “as the market changes, fewer buyers are willing” to do this because increased inventory provides more options. On the other hand, he adds, if a buyer really wants the home, allowing a lease-back can give them an edge in a competitive market.

In this scenario, the buyer gets some cash back and the seller has the proceeds from the sale to apply toward a new home.

According to Mark Takacs, a top-selling agent in Atlanta, “The seller who is renting it back takes good care of the place — it was their house.”

Extend the closing period

According to Barber, the second-most popular option is extending the closing period. This allows the seller to remain in the house for a specified period of time. It’s a riskier option, because, while the house is under contract, it’s possible for the buyer to back out. Barber points out that the seller doesn’t have the proceeds from the sale to apply toward a new house, either.

Find temporary housing

Sellers may choose other options — staying with family, renting nearby, or house sitting. Perhaps they own a vacation home they can stay in temporarily. Barber suggests considering a short-term rental.

Buy your new house first

If you find the house you want before you sell your own house, it can carry some financial risk. You may have to come up with a down payment and carry two mortgages. To overcome that daunting debt and get around the problem of coming up with a down payment, if your credit score is high and your debt-to-income ratio is low, you may qualify for a bridge loan, a short-term loan designed specifically to bridge the gap between selling one house and buying another. This typically works best in a seller’s market where your home is likely to sell quickly if priced correctly.

The upsides

• Securing the perfect home: You get the home you really want.
• Avoiding moving twice: You can save on the cost and stress of moving twice and (maybe) storage.
• Having time to make improvements: Whether you want to make major improvements, such as an addition or remodel, or minor improvements like painting, buying the new house before you sell your old house gives you time to accomplish these changes.
• Benefiting from market shift: If prices in the market rise, you earn more on your home sale.

The downsides

• Balancing two mortgages: This can be financially burdensome and stressful.
• Taking on high-interest loans: We’ll break these down for you below.
• Feeling pressure to sell: You might not get as much as you could from your house sale because you’re worried about carrying two mortgages and get in a hurry to sell quickly.
• Risking the market: If prices in the market fall, you may pay more for your new home than you get out of your old one.

How to make it work

Make a contingent offer

If you found your dream house, but can’t afford to pay for it until the sale of your own home closes, you can make a contingent offer. This means you will enter contract on the new home when and if your home sells. Keep in mind that sellers don’t look favorably upon this type of offer. In a seller’s market, when competition is fierce, your offer may be declined because sellers don’t want to wait around to see if you can sell your house before buying theirs.

Apply for a HELOC

The benefit of owning your home is the ability to use it as an asset to borrow against. You can open a Home Equity Line of Credit (HELOC) to pull funds for your down payment and mortgage payments on the new home, borrowing up to 85% of your current home’s value minus the amount you owe.

To estimate if you’ll qualify before meeting with a lender, calculate your loan-to-value ratio (LTV). LTV is a percentage score based on the current value of your home, the outstanding balance on your mortgage, and your credit score. You can find many easy-to-use online calculators to estimate your LTV and how much you’re eligible to borrow via a HELOC.

Opt for a bridge loan

Although rare these days, bridge loans allow you to finance the purchase of your new home by borrowing against the equity of your current home. The loans are typically for a six- to 12-month term, so they do not follow the standard “ability to repay” rules.

While approval is largely based on the value and equity of your property, you still need excellent credit and sufficient income to carry two mortgages. Bridge loans are notoriously pricey, with higher interest rates than standard home loans (rates vary, but expect them to be at least 2%-3% higher) and come with additional fees. They are also difficult to obtain from institutional lenders, so you’ll probably need to go to a private lender.

Rent your old home in the interim

If you move into your new home, you can become a landlord and rent your old house to cover the mortgage. Barber points out that not everyone can afford a second mortgage to purchase the new house before selling the old one, but if you can, this may be a viable option.

It’s wise to consult an attorney and your insurance agent to be sure you and your property are protected and to determine all the steps and permissions required. In addition, be clear with tenants about your intentions and expectations regarding any showings and open houses, such as scheduling, who is responsible for cleaning, and whether tenants need to leave.

Check with your state’s laws, but most require 24- to 48-hour notice of showings. You’ll also need to know what your state’s laws are regarding move-out notice. Typically, it’s between 30 and 60 days, but it depends on the state.

Keep in mind that renters can cause severe wear and tear on the property, and being a landlord is not for everyone.

Cash out with Airbnb

As opposed to a long-term rental, you can make it available for a short-term rental by listing your home on Airbnb, Vrbo, or other vacation rental sites. Airbnb hosts earn an average of $924 a month. This option becomes more challenging if you move out of the area. Regulations limiting short-term rentals are developing, so be sure to check your local laws before listing.

Buying and Selling at the Same Time?

Juggling the sale of one home and the purchase of another can be stressful even under the best of circumstances. Working with a top agent on both ends of the deal can help ensure an outcome that works best for you.

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Sell and buy at the same time

Ideally, you hope to coordinate the purchase of your new home with the sale of your old one. Using the same agent for both transactions can increase the odds of pulling this off by streamlining communication – a real benefit when you’re trying to coordinate dates or have a contingent sale. You may even be able to negotiate a discount on the commission.

Work with a top agent

“What separates a top agent is finding a solution for the client,” Barber states. That goes beyond price to include strategy. He has acquired clients due to the solutions he has offered, such as adding a virtual component or drone footage that other home listings did not include. “You need to study the market and know what’s going on with buyers and sellers.”

It can be difficult to find someone experienced as both a buyer’s and a seller’s agent. You can connect with proven agents by using HomeLight’s free Agent Match platform, which analyzes millions of real estate transactions in order to determine the top agents in your neighborhood.

Get backed by the right lender

Takacs recommends working with a local lender because these smaller operations understand the local market and have a more personal interest in your loan closing on time.

“It’s OK to shop fees and rates to some degree, but I wouldn’t make that my primary decision point,” he says. “It’s more about closing on time, the back office not screwing things up, the underwriter being local.”

Your agent can point you to a trusted lender they have worked with. If you’re still curious about the bigger backers, U.S. News provides a detailed guide to the best mortgage lenders.

Use a home “buy before you sell” platform

Option 10: Use a Buy Before You Sell program

If you’re looking for a low-risk way to buy a home while selling your current one, there are a number of programs available that enable homeowners to buy a new home before selling their old one without the usual uncertainties and hassles. If you’re in the states of California, Texas, Florida, or Colorado, consider exploring HomeLight’s Buy Before You Sell* program.

*BBYS services may not be currently available in your area.

Choose the path that best fits your needs

Selling your home before you find a new one can deliver benefits:

• You’ll know what your budget for a new house is.
• You can put the proceeds from the sale of your house toward the purchase of your new one.

However, you run the risk of having to move twice and store your furniture if you can’t find a new home quickly – and you may get stuck in a short-term rental.

Whichever path you take, remember that you have options and keep the goal in mind: leaving behind a house that no longer suits your needs in order to move into one that does.

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You’re ready to sell your house, but there’s one small detail: It’s held in an irrevocable trust. You may be wondering how this will affect the process of listing and selling the property — or if it’s even possible to sell at all.

In this guide, we’ll take a deep dive into how to go about selling a house that’s in an irrevocable trust — the parties involved, the steps required, the pros and cons, mistakes to avoid, and the benefits of partnering with an experienced real estate agent.

Keep in mind that these are just guidelines. Your trust agreement, which is a document created by the creator of the trust, will ultimately dictate the specific terms of your process.

What is an irrevocable trust?

In a definition from Cornell Law School, an irrevocable trust is described as “any trust where the grantor cannot change or end the trust after its creation.” Real estate investors typically define an irrevocable trust as a legal arrangement in which the trustee (usually the settlor, or creator of the trust) cannot make changes to the trust — nor can they dissolve it — without the permission of the beneficiaries.

This type of trust is often used to protect assets from future creditors, minimize estate taxes, or expand access to government benefits.

Who are the parties involved in an irrevocable trust?

For every irrevocable trust, these three important parties are always involved:

• Settlor/grantor: This is the person who sets up the trust and moves the assets — namely, the property in question — into that trust. At the time that an irrevocable trust is established, the settlor no longer has any rights to or ownership of the property.
• Trustee: The trustee is the person or company that the settlor chooses to oversee and manage the trust. This person’s core role is to protect the best interests of the beneficiaries named in the trust.
• Beneficiary or beneficiaries: When the settlor creates the trust, he or she names one or more beneficiaries who will ultimately receive the assets that are placed in trust.

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Are there different types of irrevocable trusts?

It’s important to understand what type of irrevocable trust you’re dealing with because this will determine what steps you’ll need to take to sell the house. Regardless of the type of trust, the trustee is responsible for managing all of the assets, staying up to date with tax payments, and maintaining all records related to the trust and the assets it contains.

There are two main types of irrevocable trusts:

• Living irrevocable trust: This type of trust is irrevocable — meaning it cannot be changed, modified, or dissolved — when the settlor is alive as well as after the settlor has died. By giving up any claims of ownership of the assets, the settlor can reap multiple tax benefits. After the settlor’s death, the trustee is tasked with paying off any outstanding debts and allocating the assets to all beneficiaries as outlined in the trust agreement.
• Trust that is irrevocable upon death: This type of trust can be modified or revoked by the settlor as long as they are alive, but once the settlor dies, it becomes irrevocable. This way, the assets cannot be seized by creditors and can be allocated to the beneficiaries without having to go through the long, drawn-out, and often costly process of going through probate court.

What are the steps to sell a house that’s in an irrevocable trust?

Although every trust is different and has its own agreement with its own specific terms, selling a home that’s in an irrevocable trust generally follows a sequence of events similar to those outlined below.

“Assuming the trustee(s) has the authority under the particular document, which they typically do, then the trustee(s) can sell the property similarly to how an individual would and retain a broker to do so,” says Christian G. Zebicoff, Esq., partner and manager of the trust and estates law practice group at Romer Debbas LLP in New York City.

Step 1: The trustee reviews the purposes of the trust

Zebicoff says it’s important for the trustee(s) to thoroughly review the purposes of the trust to make sure the sale fits the trust’s purposes and is allowable. “They should have trust counsel who can advise them concerning their fiduciary duty and whether such a sale is appropriate,” he adds.

Step 2: The trustee contacts a real estate agent

Partnering with a trusted real estate agent will always give you an edge when selling any property, but it’s particularly important when the house is in an irrevocable trust. The trustee should find a suitable real estate agent to help prep and list the home.

“Although it’s not typically a requirement to enlist the services of an agent, it’s advisable if the trustee is attempting to sell at the highest price, which is the trustee’s fiduciary duty,” says Zebicoff.

Step 3: The trustee files all paperwork for the sale

Once an offer has been accepted, the trustee will need to file all of the necessary paperwork with the court to verify that the property has been sold and that all proceeds have been moved into the trust. At that point, ownership of the property is transferred to the buyer. However, Joel Efosa, CEO of Fire Cash Buyers, points out that there may be some additional steps involved if the property is subject to probate.

“Probate is the legal process by which a deceased person’s assets are distributed,” Efosa explains. “If the property is held in an irrevocable trust, it may not be subject to probate. However, if the trustee is also the executor of the estate, they may need to obtain a court order before selling the property.”

Step 4: The assets in the trust are distributed and taxes are paid

After the sale is complete, the trustee is responsible for making sure all proceeds from the sale are distributed to the beneficiaries named in the trust. Depending on the terms in the trust document, this may be distributed in a lump sum payment or in multiple payments over time.

Depending on how the proceeds are going to be handled, the trust can pay any taxes due. If the trust transfers the proceeds to beneficiaries, the beneficiaries may have to report the income on their individual tax returns and pay any applicable taxes.

Step 5: The trustee files Form 1041

The U.S. Form 1041, the “Income Tax Return for Estates and Trusts,” must be filed with the IRS when selling a property held in a trust. Per the IRS, this form collects the following information:

• The income, deductions, gains, losses, etc. of the estate or trust
• The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries
• Any income tax liability of the estate or trust
• Employment taxes on wages paid to household employees

What are the tax implications of selling a property in an irrevocable trust?

When selling a home in a traditional sale, you generally don’t have to worry about paying capital gains taxes unless you’ve lived in the house for less than two years, it’s a second home or investment property, or you’ve earned a profit of more than $250,000 on the sale ($500,000 for married couples filing jointly).

But what about selling a house in an irrevocable trust? Will the seller be on the hook for capital gains taxes?  If the property is held in an irrevocable trust, the capital gains may be sheltered from taxation. This can be a significant advantage if you have a large amount of equity in the home.

But what about the tax basis for the home? The tax basis refers to the value of a property for tax purposes. When the home is sold, the total profit or loss is typically calculated based on the following equation:

Sale price – amount of basis + any sales expenses
(including real estate commissions)

“Unlike revocable trusts, assets in irrevocable trusts are generally not subject to tax or step-up basis,” says Kevin Bazazzadeh, founder of Brilliant Day Homes, who has managed multiple sales of homes in trusts. “The taxable gains of the grantor are passed on to the beneficiaries when the grantor dies and the assets are sold.”

It’s important to consult your professional advisor to identify the tax implications involved in your selling situation.

5 common mistakes sellers make when selling a house in an irrevocable trust

Any home sale will come with its share of hiccups, but when selling from a trust, the potential for missteps is increased. Be on the lookout for these common mistakes.

1. Not getting professional help when needed

Bazazzadeh stresses how important it is for trustees to consult with an attorney or tax advisor before taking any action that could have tax consequences. Otherwise, they could end up owing taxes on the sale.

2. Not understanding the terms of the trust

Every trust has its own specific requirements, and it’s essential that the trustee fully understands all of the provisions of the trust document before taking any action. “This will help them avoid making any mistakes that could jeopardize the validity of the trust,” notes Bazazzadeh. “For example, if the trust states that the property must be sold within a specific time frame, the trustee must take action within that time frame.”

3. Not keeping good records

“The trustee should keep detailed records of all transactions related to the sale of the property,” says Bazazzadeh. “This will help them prove that they followed all of the appropriate procedures and will help them avoid any disputes with the beneficiaries.”

Greg Clark, a high-volume real estate agent in Texas, once had a client whose parents were about to go into long-term care. He wanted to sell his parents’ house, which was in a trust. The very next week, in an unforeseen and tragic twist, both parents died within three days of one another. At that point, Clark learned that his client did not have any of the documents for the trust, which also didn’t exist digitally. This caused significant delays and hassles as they hunted down the retired attorney who had long ago drawn up the trust.

“If he had kept the trust documents and records, it would have been a much easier process,” Clark says.

4. Failing to follow state laws

Trustees must make sure they are following all state and federal laws when selling trust property, cautions Bazazzadeh. This includes paying any taxes that may be due.

5. Selling the property for less than it’s worth

The trustee has a fiduciary duty to get the best possible price for the property, Bazazzadeh points out. “If they sell it for less than it’s worth, they could be held liable for any losses incurred by the beneficiaries,” he says.

Pros and cons of selling a home in an irrevocable trust

If you’ve inherited a home in a trust and are on the fence about whether to keep it or list it, it may be helpful to weigh the pros and cons of selling.

Pros:

• The main advantage of selling a house in an irrevocable trust is that it can help protect your proceeds from creditors or estate taxes. This can be helpful in the event that the property owner is going through bankruptcy or other financial struggles.
• The settlor won’t have to pay capital gain taxes. “Proceeds from the sale of the house go back into the trust account and the trust pays the capital gain tax,” says Alex Mitchell, an Atlanta tax attorney with Cumberland Law Group. (Additionally, because assets held in the trust are not a part of an estate, estate taxes are typically not paid on that asset.)
• If a property is held in an irrevocable trust, it can bypass probate and go directly to the beneficiaries of the trust, notes Bazazzadeh.
• Zebicoff points out that if the house is sold, there is typically less investment risk because the proceeds are conservatively invested if they are not paid out to the beneficiary. “The trustee has a fiduciary duty to invest the assets prudently, and there is typically more market risk with a piece of real property than if the property were sold and held in a balanced portfolio of bonds, conservative stocks, and/or cash,” he explains.

Cons:

• You may not get full market value. The disadvantage is that you may not be able to sell the property for its full market value if you need to sell it quickly.
• Mitchell points out that if proceeds from the sale are paid out from an irrevocable trust, the beneficiary will have to pay taxes, as the money is taxable and treated as income. If the proceeds are not paid out, the trust is required to pay the capital gains tax.
• Bazazzadeh cautions that once the property has been transferred into the trust, it can be hard to change who the beneficiaries are or how the assets will be distributed.

Do you need a real estate agent to sell a house in an irrevocable trust?

While it may not be a requirement, partnering with an experienced real estate agent has been shown to increase the sale price of any home, including one held in an irrevocable trust.

According to research from the 2021 NAR Profile of Home Buyers and Sellers, homes sold directly by the owner (FSBOs) typically sell for less than the selling price of other homes, with a median sale price of $260,000 compared to $318,000 for homes sold via agents.

Efosa points out that some trust agreements explicitly state that the seller should use a real estate agent to sell the property — most likely to ensure the highest possible sale price. “However, if the trust does not mandate the use of an agent, the seller may have more flexibility in how they choose to sell the property,” he says.

Another key consideration is the market conditions in the area where the property is located, Efosa notes. “In some markets, it may be difficult to sell a property without the assistance of a real estate agent,” he explains. “Ultimately, it is important to consult with an attorney or other professional advisor to determine what will work best in your particular situation.”

Bazazzadeh agrees that working with a real estate agent can help ensure a smoother sale, no matter what selling circumstances you might be facing. An agent can assist you with finding a buyer who is willing to work with the terms of the trust, finding a title company willing to insure the property, and getting the property appraised for the correct value.

Not sure where to start? Our free Agent Match platform can connect you with top agents in your area who have had proven success selling properties like yours.

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To give you the most up-to-date information, we talked with real estate attorney Koert Brown with Rammelkamp Bradney in Illinois, and top real estate agent AJ Pettersen of the Advisor Realty Group, a high performance real estate team in Minneapolis that also specializes in Townhome sales.

Disclaimer: Information in this blog post is meant to be informational and used as a helpful guide only, and not professional tax or legal advice. If you need help determining the taxes on the sale of your second home, HomeLight always encourages you to reach out to a tax advisor regarding your particular situation.

Selling a second home vs. selling a primary residence

When selling a primary home, the seller generally doesn’t have to worry about paying taxes on profits — up to a certain point. The IRS allows a single-filer homeowner to forgo paying taxes on up to $250,000 gained from the sale, and a married couple can exclude up to $500,000 in profit.

Brown says a property is considered a primary residence if the owners occupy it the greater part of a year (6+ months) for at least two of the past five years, and can prove it. For audit purposes, proof is determined by where the owner is employed, banks, receives mail, and attends community places like recreational clubs.

You typically have to pay tax on capital gains on sale of a second home at a rate of up to 20% in 2022, depending on your tax bracket.

A property is considered your second home if it’s a vacation home or an investment property that you rent out.

How much you’ll pay in capital gains tax depends on several factors:

• How long you’ve owned the second home
• The cost of owning the property, including the cost of capital improvements and any fees
• Your income tax bracket
• Your marital status
• Whether you rent out your second home
• Whether you replace that property with a like-exchange
• Whether you claim an investment loss in the same tax year

Selling a Second Home? Work With a Top Agent

While you will likely have to pay tax on any capital gains realized from the sale of your second home, working with a top agent can take some of the sting out.

HomeLight data shows that the top 5% of agents across the U.S. help clients sell their home for as much as 10% more than the average real estate agent, potentially helping to offset the cost of taxes.

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What are capital gains taxes?

Capital gains taxes are the taxes you pay when you sell an appreciating asset and make a profit (capital gain). According to the IRS, there are two main categories of capital gains tax on the sale of a non-primary residence:

• Short-term capital gains tax. This is a tax on any profits from the sale of a property that you’ve owned for one year or less. For short-term properties, you’ll typically pay the same tax rate as you would for your ordinary income.
• Long-term capital gains tax. If you’ve owned your second home for more than a year, you’ll typically pay a long-term capital gains tax between 0% and 20%, depending on your earnings. According to the IRS, property owners will pay a 15% tax unless they exceed the higher income level.

What’s the 2022 capital gains tax rate?

For tax year 2022, a capital gain rate of 15% applies if your taxable income is $40,400-$445,850 for single, $80,800-$501,600 for married filing jointly or qualifying widow(er), $40,400-$250,800 for married filing separately, or $54,100-$473,750 for head of household.

In 2022, a net capital gain tax rate of 20% applies if your taxable income exceeds the thresholds set for the 15% capital gain rate.

Ways to reduce your capital gains tax

The capital gains tax may seem high, but don’t kiss all of those tax dollars away just yet. Depending on your situation, there are several different ways that you may be able to mitigate some of your capital gains.

Adjust your profits to reflect any acquisition costs or property improvements

At the most basic level, your capital gain is calculated by figuring out your cost basis and subtracting any profit made from the sale.

The cost basis is typically the amount you spent to buy and improve your second home, including the purchase price, any acquisition or closing fees, and the cost of any capital improvements you made while owning it. Capital improvements are permanent repairs or upgrades not including routine repairs or maintenance. For a list of the capital improvements you can add to the cost basis of your home, see IRS Publication 530.

You can also increase your cost basis by adding any qualifying real estate fees, such as real estate commission and closing costs, paid when selling your second home, which can reduce your taxable gain even further.

How to calculate capital gains tax

Remember that the capital gains tax depends on marital status, how long you’ve owned your home, your taxable income, and your net profit. For example, if you’re married filing jointly with a net combined income of $233,000, and you purchased your second home for $400,000 and sold it for $500,000, it would initially appear that you profited $100,000 from the sale.

But if you also spent $15,000 on acquisition costs, $20,000 to renovate the bathrooms, $25,000 to put on a new roof, and $30,000 in real estate commission, your cost basis may be $490,000. Your profit could actually only be $10,000. In this example scenario, you’ll pay a capital gains tax rate of 15% or $1,500.

Depreciate the property if it was used as a rental

If you rent out your home,  you can typically deduct depreciation on an annual basis. Simply put, depreciation is the tax deduction of the cost to fix, update, maintain, or own a rental property, spread out over the years you own the property.

If your second home was rented out while you owned it, you could opt to deduct real estate depreciation for the number of days it was occupied by renters or available to rent each year. As an example, if the property was rented or available to be rented for half of the year, you could claim 50% of the yearly depreciation deduction. Each year, the depreciation would continue to reduce your cost basis.

However, keep in mind that if you depreciate your second home, you’ll have to pay another tax called a depreciation recapture, which is a flat 25% of the cumulative depreciation. For example, if you’ve claimed $35,000 in total depreciation, you would likely face an additional $8,750 in taxes when you sell.

Rent out your second home

You cannot depreciate a vacation home, which is considered personal property, but because it’s a second property, when you sell, it is fully taxable at the capital gains rate as an investment. However, renting out a vacation home is one of the most common ways for a homeowner to mitigate their tax liability on the sale of a second home. In this case, you can typically deduct depreciation and the costs to own, maintain, and rent that property.

To use this strategy, you’ll need to start renting out the home long before you list it. It’s also important to note that if you use this strategy to mitigate your capital gains tax, you cannot have used it as a primary residence the last two of the past five years, and you will very likely have to pay the depreciation recapture tax. It’s strongly encouraged that you consult with a tax and/or real estate professional to map out whether this strategy is available and how it might apply to your situation.

Make your second home your primary residence

Another way to reduce your tax liability is to turn your second home into your primary residence, which will make you eligible for up to $500,000 exclusion. Every homeowner will most likely exempt the sale of a primary residence within their lifetime, says Brown.

The definition of primary residence is most important when going about making your second home your primary residence. You must have lived in it the majority of the year (6+ months) in any given year for two out of the last five years.

“That’s the safe harbor that will get you there. The tests, facts, and circumstances that prove a home is your primary residence include your place of employment, where you have your mail sent, where you bank and where you go to church,” says Brown.

It’s important to note that you can’t use this strategy if you have excluded a capital gains tax on the sale of another property within the past two years.

Do a 1031 exchange and defer capital gains tax

Named for the IRS Code Section 1031, a “1031 exchange” — also called a “like-kind exchange” — allows you to swap out an investment home for another property of the same type without paying any capital gains tax.

The 1031 exchange can generally only be used if the real estate involved is an investment or business property, so you can likely only employ the like-kind strategy if your second home is used primarily as a rental rather than for personal enjoyment, and the replacement property cannot be used as your primary residence. There are also other specific exclusions in the tax code even if a property is used for investment or business purposes. These include:

• Inventory or stock in trade
• Stocks, bonds, or notes
• Other securities or debt
• Partnership interests
• Certificates of trust

If you want to do a like-kind exchange, the clock starts ticking right after you sell the first property. You must find the replacement home within 45 days and must close on the second purchase within 180 days. If you miss that deadline, you’ll get hit with the full capital gains tax.

With the 1031 exchange, you do not avoid capital gains tax altogether. Instead, you are deferring the tax until you sell the replacement property. However, there is typically no limit to the number of times you can defer the capital tax with the 1031 exchange. You can continue rolling capital gains into a replacement investment property indefinitely, deferring the tax over and over and eventually paying it or passing the rental property to a beneficiary.

Property requirements for the 1031 exchange

So you’d like to take advantage of the 1031 exchange rule — but how do you know if your property and the replacement property qualify?

For the initial property, these conditions apply:

• You must have owned and held the property for at least 24 months immediately preceding the 1031 exchange; and
• You must have rented the subject property at fair market rates to other people for at least 14 days (or more) during each of the preceding two years; and
• You must have limited your personal use and enjoyment of the property to not more than 14 days during each of the preceding two years, or 10% of the number of days that the property was actually rented out to other people during each of the preceding two years. For example, if you rent your investment property for 330 days in a given year, you can use it for personal enjoyment no more than 33 of the remaining 35 days of that year. However, time spent in the home to do maintenance and repairs don’t count toward that limit.

For example, if you rent out your vacation home at least 14 days per year for two consecutive years, don’t live in it more than 14 days per year, and it’s considered an investment property in the eyes of the IRS, it could be eligible for the 1031 exchange.

Likewise, the replacement property must meet the following criteria:

• You must own the property for at least two years after exercising the 1031 exchange; and
• You must rent it out for at least 14 days per year; and
• You cannot use the property for personal enjoyment for more than 14 days per year or 10% of the days the home is rented out.

According to Petersen, the biggest difficulty with 1031 exchanges right now is the deadline combined with the inventory shortage.  “It’s not easy to find a like-kind property for a 1031 exchange in the first place and it can be harder still to do it in a 45-day time frame. I’ve had 1031 exchanges fall through because of the housing shortage.”

A warning about deferred 1031 exchanges

For homeowners wanting more flexibility in the 1031 exchange timeline, there is such a thing as a deferred exchange in which the owner sells the property to a qualified intermediary, known as a 1031 Accommodator, who buys the property at a later date. The entire process must still take place within 180 days and the sale is more complex as well as more risky.

The IRS warns that homeowners should fully vet a 1031 Accommodator and beware of schemes as there have been instances of these sales falling through or not meeting IRS requirements. It’s important to consult with a tax and/or real estate professional to see if this strategy might work for you.

Offset capital gain from sale of rental property with an investment loss

If your second home is a rental property and you are holding an investment that has lost value, there is a tax provision that may let you sell that investment in the same tax year to offset some or all of your capital gains. Also called tax-loss harvesting or tax-loss selling, this investment strategy is commonly used to minimize taxable capital gains from investment income, but can sometimes also be used to offset capital gains from the sale of a rental property.

When using this strategy, Brown says it’s important to remember that a short-term capital gain can only be offset with a short-term capital loss; a long-term capital gain can only be offset by a long-term capital loss.

Example: In July 2021, Jim and Elizabeth sold a rental property for a net profit of $45,000. They were holding a stock investment that had lost $55,000 in value. To offset their capital gains for tax year 2021, they sold $45,000 of that stock at the end of 2021 and paid $0 capital gains tax.

When in doubt, talk to a professional

Real estate taxes can get complicated fast. It’s best to partner with a real estate accountant and a top real estate agent with experience in selling second homes. They can help you determine your net profits and identify opportunities to mitigate your capital gains tax so you don’t pay more than you absolutely must.

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You can minimize your capital gains tax — taxes levied on profits from selling capital assets — in two key ways: “Keep excellent records of all deductible expenses, and work with a tax professional any year you sell a house,” says Christopher Skinner, attorney at law and Certified Public Accountant (CPA) with over 20 years experience in public accounting and private industry.

We’ve sifted through the most up-to-date IRS tax guidance for home sellers in 2022 (Topic 409 is your friend, along with Publication 523) and compared notes with Skinner to provide you with 6 key tax breaks that can save you money come April.

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own tax situation.

What are capital gains?

Generally speaking, the government wants a piece of any “capital gains” (aka profit) you make from selling off assets like stocks, bonds or—you guessed it — property. Luckily, many of the pricey parts of homeownership — large renovations, mortgage interest, and property tax — can be deducted to lower what the IRS requires you to pay taxes on when you sell.

Ways to minimize capital gains tax when selling a house

1. Exclusion of gain

The exclusion of gain isn’t technically a deduction, but it’ll impact your bottom line to the same effect: less taxable gain.

Most sellers who sell their personal residence (as opposed to an investment property or second home) are qualified to exclude $250,000 if single or married and filing separately and $500,000 if married and filing jointly.

To fully understand the value of exclusion of gain, you’ll need to learn a couple new vocabulary words:

• Capital gains: the taxable profits you make from the sale of your home. Capital gain is equal to how much you sell your home for minus your home’s cost basis.
• Cost basis: The original purchase price of the home.
• Adjusted cost basis: Whatever you paid for your home plus any capital improvements you put into your home.

If your capital gains minus your cost basis are less than the exclusion of gain you qualify for, you won’t owe the IRS any taxes on your gain. If your capital gains minus your cost basis exceed your exclusion amount, you’ll pay tax on only the overage. And, if you don’t qualify for an exclusion at all, you’ll be taxed for your entire gain.

How do I know if I qualify for the exclusion?

According to IRS Publication 523, in order to exclude the above gains from your tax obligation, you need to meet the following 3 qualifications:

Ownership: You owned the property for at least 24 months during the last five years.

Use: You lived in the property for at least 24 months during the last five years.

Look-back: You did not exclude the gain from the sale of another house within two years from the sale of this house

Example:

Sofia and Garett are selling their primary residence. They purchased the home for $350,000 and spent $50,000 on capital improvements for an adjusted basis of $400,000. They sell the home for $750,000 (in a red hot seller’s market) for a capital gain of $350,000. Sofia and Garett qualify for the $500,000 exclusion of gain, and thus none of their sale profit will be taxed by the IRS.

So, if your profit is less than your exclusion, does the IRS even want to know about the sale at all?

“Definitely still report it,” Skinner cautions. “If you don’t, the IRS may well assume it’s all gain.” To help you report the sale to the IRS, Skinner says you should look out for a 1099-S issued by the sale’s title company.

2. Partial exclusion of gain

Let’s say you haven’t had the opportunity to own or live in your house for two of the last five years before the date of sale. The IRS says you may still qualify for a partial exclusion of gain.

To qualify, your main reason for selling your home must be a change in workplace location, a health issue, or an unforeseeable event. To find out how much of your gain is taxable, the IRS directs taxpayers to Worksheet 3.

Example:

Luke bought a home on the East Coast with the intention to plant roots near his job. However, Luke’s mother unexpectedly develops a health condition which requires special in-home care. Luke quickly decides to relocate closer to his mother to help take care of her and to advocate for her throughout her treatment. Because Luke’s job requires onsite attendance, his abrupt move leads to loss of income and financially requires him to sell his home. Luke qualifies for the partial exclusion of gain. He works with his tax advisor and uses Worksheet 3 to determine how much of his gain is still taxable.

3. Capital improvements

If your home sale profits exceed the capital gains exemption threshold ($250,000 for single filers, and $500,000 for married filers), it’s time to review any capital improvements you made to the home while you owned it.

“Adding capital improvements to your cost basis mitigates your tax liability by reducing your taxable gains,” Skinner says. It boils down to this equation:

Taxable income = amount realized – adjusted basis

IRS Publication 523 defines a capital improvement as any home improvement that materially “adds market value to the home, prolongs its useful life, or adapts it to new uses.”

Routine and run-of-the mill home repairs are not capital improvements. Confused about the difference?

Think of repairs as reactive projects you take on when something breaks. Capital improvements, in contrast, aren’t reactive repair projects but rather forward-thinking and intentional projects done with the intention to add value.

Modernizing your kitchen into this century or opening up your floor plan are capital improvements that differ from repairs because they are investments in the value of the home — and they’ll be reflected in the home’s sale price. That’s why they raise the cost basis of your home.

Fixing a leaky faucet or repairing a hole in your roof, however, don’t add value. They simply maintain the baseline condition and value of the home. While they’re necessary for keeping your home in working order and may cost a bit, they can’t be deducted from your home sale.

Examples of capital improvements

So what can be deducted? Page 9 of IRS Publication 523 provides specific examples of improvements that actually add to the value of the house and, thus, can be deducted from your tax obligation:

• New bedroom, bathroom, deck, garage, porch, or patio
• New landscaping, driveway, walkway, fence, retaining wall or swimming pool
• New storm windows or doors, roofing, siding, or satellite dish
• New attic, walls, floors, or pipes and ductwork
• New HVAC, furnace, central humidifier, central vacuum, air/water filtration systems, wiring, security system, or lawn sprinkler system
• New plumbing, septic system, water heater, soft water system, or filtration system
• New built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, or fireplace

“It’s important to remember that the IRS only lists examples of capital improvements,” Skinner notes. “It’s not a definitive list.” The key to determining whether a capital expenditure is a repair or a capital improvement comes down to added value.

Remember that you can’t deduct capital improvement projects from your taxable income like a mortgage interest or property tax write-off. These reductions of capital gain are instead added to your home’s cost basis to decrease the amount you’ll owe in taxes when you sell.

Example:

Miles purchases a home for $380,000 and spends $20,000 on a bedroom addition and $10,000 on a kitchen remodel. His adjusted basis is $410,000. He sells the home for $600,000 and subtracts his adjusted basis from his amount realized: $600,000 – $410,000 = $190,000. Because Miles qualifies for the $250,000 exclusion, he owes no gains tax.

4. Selling expenses

Selling expenses quickly add up — averaging $31,000 in fees for expenses like advertising, agent commissions, and other closing costs. Luckily, you can subtract all of these selling expenses from your gain to lower your tax liability.

Yet another reason why it’s worth it to hire a top real estate agent — who’ll guide you through the daunting home selling process to sell your house faster for more money: You can deduct their fees fully from your capital gains tax obligation.

Connect with a Top Agent to Help Maximize Value

Even rockstar agents can’t make your tax liability disappear, but HomeLight data shows that the top 5% of agents across the U.S. help clients sell their home for as much as 10% more than the average real estate agent, helping offset the tax bill.

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Examples of deductible selling expenses

Skinner says it’s vital to keep track of all the money you spend attracting high bids on your home. “Remember that staging is also a selling expense,” he remarks, alongside these other selling expenses detailed in IRS Publication 523:

• Real estate agent commissions: It’s customary for the seller to pay commission fees for the sale, which are split between the listing agent and buyer’s agent. HomeLight’s Commission Calculator allows you to access commission data specific to your city — the national average is 5.8% of the sale price. This commission covers your agent’s pricing assistance, marketing prowess, and expert negotiation skills, among other services.
• Transfer taxes/recording fees: Transfer taxes are one-time fees levied on home sales as a percentage of the property’s value, typically paid by the owner. Transfer taxes cover the cost of transferring the home’s deed to its new owner and vary by state, county, and city. Some states charge no transfer taxes at all. If you do have to pay them, though, they can be treated as selling expenses.
• Settlement or escrow fees: Settlement fees, sometimes called escrow fees, are paid directly to the third-party company that handles the money and title transfers for your home sale. Settlement fees are generally divided between the buyer and seller depending on what the purpose of the specific settlement fee is and what is customary in the market where the property is located, but who pays these fees can be a matter for negotiation in many instances. Expect them to cost about 1% of the home’s sale price.
• Recording fees: Recording fees are a one-time expense charged by the government to record the sale of your home to its new owner. Whether the buyer or the seller pays the fee is up to negotiation. Recording fees vary widely by county, from as low as $15 to upwards of $60 per page.
• Advertising fees: How much did you spend marketing your home to buyers? 90% of homes staged prior to listing left the market faster than unstaged homes, according to the Real Estate Staging Association, but staging adds up to $1,500 on average. Tack on home photography and you’ll have a sizable pot of deductible costs. Just be careful not to double-dip; if your agent included the costs of these marketing services in their commission, you can’t count them as selling expenses twice.
• Attorney fees: If you hire a lawyer to help sell your home (some states require it), expect to pay $200 – $600 an hour.
• Mortgage points or loan charges paid on behalf of buyer: Seller-paid points are concessions paid by the seller on behalf of the buyer to lower the interest rate on the home’s mortgage. They’re paid in a lump sum by the seller to sweeten the sale for a buyer. How much you spend on points will vary depending on the number of points you buy and the home’s price.
• Appraisal fees: Appraisal fees are paid towards the obtaining of a neutral assessment of your home’s value and are typically paid by the buyer and required by their lender, although you can choose to cover some portion to make a deal more attractive. Appraisal fees are around $300 – $400 on average.

It’s likely that you won’t incur every single one of these costs when you sell your home.

Keep track of your receipts and invoices for all services pertinent to selling your home so you know where you stand before tax season. Many closing costs will be detailed in the settlement sheet prepared by your closing agent (or, in some states, an attorney).

Example:

Avery and Taylor’s home’s adjusted basis is $350,000. They sell their home for $850,000. Their selling fees, including agent commissions, escrow fees, attorney fees and advertising expenses are $65,000. To calculate their amount realized, they subtract their selling expenses from their home’s sale price: $850,000 – $65,000 = $785,000. Their taxable gain is equal to their amount realized minus their adjusted basis: $785,000 – $350,000 = $435,000. Because they qualify for the 500,000 exclusion, Avery and Taylor aren’t required to pay any capital gains tax.

5. Mortgage interest deduction

Though it’s not technically a seller-specific tax break, we’d be remiss if we didn’t mention the mortgage interest tax deduction. Homeowners have long enjoyed the mortgage interest tax deduction as one of the major benefits of owning a home. No matter how long your house has been on the market, if you have a mortgage on the house you’re selling — and it’s your main house — there’s a good chance you can deduct your mortgage interest from your income taxes.

The IRS allows you to deduct interest on up to $750,000 of a loan for homes bought after December 15, 2017 — down from $1 million for loans obtained before the Tax Cuts and Jobs Act (TCJA) took effect. Because most homes nationally cost well below $750,000 according to the 2021 Census data on home sales, most homeowners are able to deduct mortgage interest in its entirety using Form 1040, Schedule A on Itemized Deductions. 

In addition to mortgage interest, you should also check into whether you can deduct mortgage “points,” which describe charges you may have paid to get a mortgage like prepaid interest or loan origination fees.

However, keep in mind there are 9 requirements you must fall under to “deduct the points in full in the year you pay them,” which you can find on this page.

“Typically, if you own a home with a mortgage you will itemize,” Skinner says. “But keep in mind, the standard deduction has increased so there are circumstances where the standard deduction is more favorable. For instance — if you are retired and the house is paid for.”

If your itemized deductions don’t add up to be greater than the standard deduction, it’s in your interest to take the standard deduction: $12,550 for single filers and $25,100 for those who are married and file jointly in the 2021 tax year. If your combined deductible expenses, including things like property taxes (see below), mortgage interest, and charitable contributions don’t exceed this amount, it doesn’t make sense to itemize.

Not sure where you stand? Work with a tax professional who can both guide you through the itemizations form and confirm if you can write off mortgage interest and mortgage points, given the requirements.

Example:

Naomi is single and paid $2,500 in property taxes and $10,000 in interest on a mortgage loan in 2021. She’s wondering whether it makes sense to itemize and trim her taxable income by $12,500 or take the standard deduction. She has no other deductible expenses. Naomi sees that, because the standard deduction for a single filer is $12,550, it’s advantageous to take the standard deduction.

6. State and local property taxes

The average property tax paid nationally on a yearly basis is $2,471, according to WalletHub and Census Bureau data. Luckily, all of that tax is likely to be deductible for the average American. While this tax break isn’t necessarily specific to sellers, you can still take advantage of it for any taxes you paid for the portion of the year you still owned the home.

The 2017 Tax Cuts & Jobs Act caps the amount a homeowner can deduct for property taxes, state and local income, or sales tax at $10,000, and you can only deduct property taxes if they were assessed by your local government and paid the previous year.

What does this mean for home sellers? If you’re up to date on your property taxes at the time of home sale, you can use what you paid last year in taxes to figure out your deduction for this year up until the property’s sale date — up to $10,000.

Just like mortgage interest, property taxes are an itemized deduction. Get acquainted with Schedule A (Form 1040) to familiarize yourself with how itemizing real estate taxes works. As always with itemization, it’s sometimes advantageous to take the standard deduction. It’s always worth consulting a tax professional to accurately assess your situation and crunch the numbers.

Example:

Malcolm and Gwen paid $1,000 in real estate tax for the year prior to the year in which they sold their house. In the year in which they sold their home, they legally owned the property for 230 days. To calculate their deduction for this year, the number of days they owned the property in the year of sale (230) by the number of days in a year (365, or 366 in a leap year) to come up with this decimal fraction of a year: 0.630. They multiply the decimal by the amount they paid in the year prior to sale: 0.630 x $1,000 = $630. This is Malcolm and Gwen’s property tax deduction.

Types of selling expenses that you can’t write off

There are more than a few deduction myths on the internet. Don’t fall into the trap of assuming you can write off these expenses, and remember that tax law is a constantly evolving beast. The latest IRS documentation or a tax professional should always be consulted for the most accurate information.

Moving expenses

Thought you could deduct the cost of a U-haul, packing tape, boxes, or moving crew? Sorry, that’s simply not a thing  — unless you’re a member of the military.

According to the IRS Publication 3, you may be able to exclude moving expenses from your income only if you meet the following conditions:

• You’re a member of the Armed Forces on active duty.
• You’re relocating permanently for a change of station, due to a military order.

If you meet these criteria, you can claim the cost of your moving expenses using Form 3903. Note, however, that you can only deduct what the IRS considers “reasonable for the circumstance of your move,” which does cover transportation and storage of your possessions and travel from your old home to your new home, including lodging. It does not, sadly, include the cost of meals.

General home repairs

While you are allowed to increase your cost basis by tacking on additional costs spent on capital improvements for the home, you aren’t allowed to deduct run-of-the-mill repairs necessary to maintain your property’s condition or get it ready for sale under current tax code Publication 523.

Confused about the difference between a repair and a capital improvement?

“For some homeowners, it can feel like a murky area,” Skinner says. The key difference is added value.

Repairs are things you do in response to something broken to keep things at a baseline state of function — mowing the lawn, unclogging pipes, repainting dingy walls.

Capital improvements, on the other hand, are forward-thinking projects you do with the intention of adding value.

For example, you can’t deduct the cost of cleaning the carpets in your home or hiring a lawn service to keep up with the grass. You can, however, deduct the cost of finishing a basement, which has a 70% ROI, or replacing unsightly old floors with polished hardwood, which will boost your home’s value by $6,555 on average.

Example:

Larissa decides to tackle some serious home TLC over the weekend. On the agenda: building a paver patio to create a clearly identifiable entertainment zone outside her home’s main entrance, fixing her tub’s unsightly grout, and hanging up a fresh set of curtains in her bedroom to improve the aesthetics of the space. Which of these are deductible?

The answer: only the paver patio, which adds $3,563 in value. While routine tub repairs and new window treatments do make a space more habitable and pleasant, neither are considered  capital improvements.

What can I deduct on the sale of my second home?

“Other than the loss of the exclusion, the other rules apply,” Skinner says. That means that while you must pay capital gains tax on any profit from selling a second home, you can still qualify for the following deductions:

• All selling expenses should still be figured into your amount realized to minimize your taxable gains.
• In most cases, sellers can still deduct full mortgage interest for a home loan up to $750,000 on homes purchased after December 15, 2017 on their second home.
• “State and local property taxes are generally deductible,” according to the IRS, and you can still deduct up to $10,000 in state and local taxes total between all properties you own per tax return. If you’re already meeting or exceeding that limit with your first home, you won’t be able to deduct additional property tax from your second home.

As is the case with most tax situations, Skinner says it’s wise to consult a tax adviser to confidently maximize your deductions, which vary state-to-state and year-to-year.

Header Image Source: (Sarah Pflug / Burst)

Six months ago you purchased your new home and just finished unpacking. Suddenly, your boss offers you the perfect dream job — in another state! Now you have to repack, sell your house, and move after living there less than a year, facing various financial challenges.

Of course, the biggest question on your mind is: Has the housing market held strong enough to actually see your home appreciate in value so you won’t lose money?

In this post, along with researched data, we’ll share valuable insights from Sherry Wiggs, a top-performing real estate agent from Westchester County, New York. Wiggs is an expert in the industry, working with 70% more single-family homes than the average Yonkers area agent.

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Why are homeowners concerned about selling within the first year?

Sometimes life happens, and selling within the first year becomes necessary due to a job relocation, divorce, or a health crisis. Typically, when you purchase a house, selling right away doesn’t give the home a chance to increase in value.

To allow time for appreciation, many homeowners will follow the 5-year rule, which is the tenet that five years is the minimum amount of time most buyers should live in a home before selling it in order to recoup their investment.

With this in mind, many homeowners will rent out the property instead of selling, which we’ll address along with other options later in this story.

According to the National Association of Realtors (NAR), the housing market has seen record-high increases in median existing home prices in the past 18 months compared to previous years. However, the rate of increase has been sliding downward in recent months.

With interest rates increasing, many economists are predicting housing affordability will curtail first-time homebuyers. According to Wiggs, even the active New York market has cooled down since last year. She gives an example of one home seller who bought their home in December 2021 and told Wiggs in July they had to sell.

“Our market is shifting a little bit, right? So we’re not getting 20 showings and 10 offers — crazy, crazy over asking [price] offers,” says Wiggs. “We’re getting less showings. We’re still getting offers, but we’re getting less offers and they’re not as aggressive.”

The strategy Wiggs suggested to her client was to list the home at the same price they originally paid to attract buyers and encourage multiple offers to avoid a potential loss.

“Because we thought if [the price] was too high we would lose buyers, so we’ve been on [the market] for only three days; we have seven showings and an open house, so we’ll see,” explains Wiggs.

When interest rates rise, it’s still possible for properties to experience appreciation. Some of the common ways that a home’s value can increase include:

• Location – popular neighborhoods and school districts
• Supply and demand – a seller’s market where demand is high
• Comparable properties nearby – known as real estate comps
• Size and usable space of your home – total square footage
• Age and condition of your home – avoiding deferred maintenance
• Upgrades and updates – remodeled kitchen or bathrooms
• Health of the economy – low interest rates and unemployment
• Desired amenities – swimming pools and solar panels

Wiggs has also seen how the power of appreciation can work to a home seller’s advantage. One of her clients bought a home in June of 2021, and the property was originally listed at $1,050,000. Her buyer bid $1,200,000, paying $150,000 over the asking price to get it. In March of 2022, the client told Wiggs they had to sell due to a relocation.

“So, because we’re in such an aggressive market, we put it on [the market] at $1,275,000, in hopes that she’d be able to get out — you know, not having to lose any money on commissions — hoping they’d walk away with a little bit. Fortunately for her, we have an aggressive market, and it went over asking [price] again, and she got $1,371,000.”

According to CoreLogic, home prices increased year-over-year by 20.2% from May 2021 to May 2022. Due to rising interest rates, their forecast is predicting only a 5% year-over-year home price increase from May 2022 through May 2023. The consumer data company is projecting that buyers will be motivated by a slowdown in home price increases and the opportunity of fewer bidding wars.

How much is my home worth now?

Whether you have been in your house for six months or six years, the value is constantly changing due to a variety of factors. It’s important to know your home’s worth to make an informed decision about selling it.

To get an initial free estimate, HomeLight’s Home Value Estimator is a convenient tool that will ask you seven questions about your property and its condition. A top real estate agent can also provide a comparative market analysis of your home’s value, or help you schedule a pre-listing appraisal of your home for more detailed information.

Can I sell my house after owning it for less than a year?

Yes, once you are the legal owner of your home, you could sell it after owning it one day. However, in many cases, this can be a costly decision due to the limited amount of time you’ve owned the property. You’ll likely face a number of out-of-pocket expenses, such as:

• Capital gains taxes – potentially short and/or long-term (see more details below)
• Closing costs that add up – such as HOA fees, property and transfer taxes, title insurance
• Cost of mortgage interest – a strategy to help make financing more affordable for buyers
• Moving costs you may not have planned for – truck, supplies, pizza for your friends
• Renovation Costs – paint, flooring, and landscaping to spruce up your house
• Real Estate Commissions – the fees can vary and are sometimes negotiable

What if I’m unable to sell my home after less than a year?

Selling on the open market isn’t the only option when you need to move quickly. You may find other alternatives that are a better fit for your situation, such as:

• Rent out your home: You might need to sell but don’t have enough equity or money to pay the seller’s fees in order to complete the transaction. If you live in a strong rental market, it may work out better to rent out your house until your home appreciates more. However, Wiggs recommends that checking with your bank to see if you’re able to rent out your property is a good idea as they usually base your loan on being owner-occupied.
• Hold onto the property a little longer: Perhaps you’re in a position where you don’t financially need to sell your home and decide to keep it as an investment or a second home.
• Vacation rental: Depending on where your home is located, renting your home as a vacation rental may be a way to delay needing to sell it immediately.
• Request a cash offer: You can skip repairs and preparations and request an all-cash offer from a home-buying service such as HomeLight’s Simple Sale platform. Tell us a few details about your home, and in as few as 48 hours, we’ll provide a no-obligation all-cash offer. Simple Sale sellers have the ability to close in as little as 10 days. The Simple Sale platform will also show you what you might get for your home selling with a top agent, instead.
• Partner with a top agent who can get you top dollar: Finding the right real estate agent who knows how to set an effective pricing strategy to help get optimal results can make the selling process easier. HomeLight’s free Agent Match platform can connect you with a top-performing agent in your market.

Ultimately, you need to determine your estimated net proceeds and weigh them against the cost of selling your home. If it doesn’t balance in your favor, you must decide if you’re willing to take a loss, or if you can wait to sell your home.

How much does it cost to sell my home?

Selling a home in less than a year can be expensive because you are essentially repeating the process when you originally bought the home, but possibly without much appreciation in value. This includes paying all the fees associated with commissions, closing, and related transaction costs. This is why time is usually needed to help balance out these expenses.

The typical costs for selling a median price home in the U.S can add up quickly and include:

• Staging and house prep fees (varies)
• Realtor commissions for the sale (5% to 6%)
• Inspection and repair fees (varies)
• Closing fees to sell, including title, recording, and escrow fees, transfer taxes, and prorated property taxes (1% to 3% of the sale price)
• Second set of closing costs (if you’re buying a new home)
• Seller concessions (2% to 6% to financially help the buyer)
• Overlap costs (1% to 2% to pay for two houses at the same time)
• Moving and relocation costs (varies and usually based on distance)
• Mortgage payoff (varies)

Closing costs vary, depending on both the regulations of your state and your particular financial situation. Using data from mortgage technology company ClosingCorp, Business Insider reports that the average closing costs required to buy a home in the U.S. in 2021 were $6,905 including transfer taxes, and around $3,860 excluding transfer taxes. Some locations have much higher closing costs, such as Delaware, New York, and the District of Columbia.

Remember to factor in capital gains taxes

A home is typically considered a capital asset by the IRS, and can be subject to taxes when you own it for a short period of time and it appreciates. Determining the taxes you owe can be complex and it’s often recommended to seek out the advice of a seasoned tax professional. However, for the most part, it usually depends on the exact amount of time you own the property, such as in the following scenarios:

When you own your home for less than one year

If you are selling your home after owning it for less than a year, you’ll likely have to pay a short-term capital gains tax on the amount you gain in profit from the proceeds. This tax is assessed on assets held for a year or less and taxed as ordinary income based on your tax bracket.

For example, in 2022, there are currently seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If your household falls into the 24% tax bracket, and you make $50,000 on the sale of your home, you could be required to pay a short-term capital gains tax of $12,000.

2022 short-term capital gains tax brackets

When you own your home for more than a year, but less than two years

Any profits from the sale of your home in this situation will typically be taxed at the lower long-term rate — either 0%, 15%, or 20%, based on your capital gains tax bracket.

2022 long-term capital gains tax brackets

The IRS does offer various capital gains tax exemptions, however, the exclusions typically don’t apply when you sell your home after owning it less than two years.

When you own your home for more than two years

If you have owned the home for more than two years, in the majority of cases, the IRS offers an exclusion if you meet the following criteria:

• Length of time: Typically, you need to have lived in the home you are selling for a minimum of two years out of the five years prior to the sale. This two-year time frame doesn’t have to be continuous or be the last two years immediately preceding the sale.
• Amount of the gain: If you owned and lived in the home for two of the past five years before the sale and are a single individual, then $250,000 of profit is typically considered tax-free. Any profit exceeding this amount is generally reported as a capital gain and taxes would be charged accordingly.
• Tax Filing status: If you are married and filing a joint tax return then the amount exempted increases to $500,000 and usually is considered to be tax-free.
• Primary residence requirement: The law lets you exclude the profit from your taxable income as long as the home was your primary residence (you lived in it for two of the five years leading up to the sale, and you did not already claim an exclusion on another home in the last two years).

Please note: If you don’t meet all of these requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion. Consult with a tax professional when selling your home, especially if you have owned your property for less than one year, to determine if other exclusions apply to your specific situation.

Conclusion: Have a plan to increase your home’s value

If you find it necessary to sell your house in less than a year, that doesn’t mean you’ll necessarily lose money, but according to Wiggs, you’ll want to have a plan to increase its value, such as doing some landscaping or painting.

“I would tell sellers when we’re selling in a short period of time, if there’s anything you can do, you should do it because you’re going to want to show why it’s worth more.”

Showing buyers why a property has increased could help offset commissions and taxes according to Wiggs.

Key takeaways for selling your home within a year of purchase

Remember the 5-year rule: Generally, it takes this amount of time to recoup your investment
Appreciation can offset costs: Getting an estimate, CMA, or appraisal can be helpful
Selling can be expensive: Closing costs can include fees, commissions, and insurance
Other options if you can’t sell: Rent out your home (ask your lender) or keep it as a second home
Capital gain taxes can occur: If the property appreciates and you own it less than two years

Lastly, when you have limited time and need a plan for your home sale, HomeLight’s free Agent Match platform can connect you with a top-performing agent in your market who can determine the right strategy for you!

Header Image Source: (Tile Merchant Ireland / Unsplash)

Before most homeowners seriously think of putting their home on the market, they usually do some quick calculations to get a ballpark figure of their potential profit.

When you’re estimating the costs of the sale, taxes can be a big part of the equation. But, oftentimes, it’s challenging to project how taxes will impact your equity.

Even spending endless hours sifting through regulations on irs.gov doesn’t guarantee you’ll arrive at the right answer.

That’s because we often think of IRS Code as laws created by a higher power that are not to be questioned.

In reality, the laws’ complexity lends itself to a lot of nuance and interpretation, which can even confound the most seasoned tax professionals.

Daylong seminars are filled with certified public accountants (CPAs) and tax attorneys debating energy credits.

Book chapters are written about the latest changes to medical deductions.

And, ultimately, well-educated tax professionals may maintain different perspectives on the application of any section of the code.

How Much Is Your Home Worth Now?

Get a near-instant home value estimate from HomeLight for free. Our tool analyzes the records of recently sold homes near you, your home’s last sale price, and other market trends to provide a preliminary range of value in under two minutes.

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How can I estimate the taxes I’ll owe on my home sale?

To arm you with the most, updated, easy-to-understand information about home sales tax, we turned to the National Society of Accountants.

The NSA’s Tax Line Help Desk independent consultant Don Schippa has researched tax issues for CPAs, tax attorneys, and other clients/professionals for nearly 40 years.

In that time, “One of the real estate questions that comes across my desk the most relates to the IRS code section 121 home sale exclusion,” Schippa begins. “In other words, the biggest concern a seller has is: Is my gain non-taxable?”

His simple, no-nonsense approach to home sales tax is invaluable in helping you understand and anticipate the federal tax factors that are likely to affect your home sale profits.

Because the issue can be quite complex, we’ll start by answering some common questions.

Can I claim expenses related to the sale of my home the same way I claim other deductions such as medical expenses?

The first part of figuring out how much taxes affect your profit starts with understanding how home sales taxes differ from other deductions.

Many taxpayers are used to thinking about reducing their tax burden by lobbing deductions — eligible expenses — against their income and revenue from other sources to come up with what they owe.

If a family itemizes deductions on their 1040 form, medical expenses go on Schedule A along with contributions charitable contributions, mortgage interest, property taxes, and some miscellaneous items.

“There’s nothing else relating to a home that goes on that form,” Schippa says. “That mortgage interest and property taxes are the main deductions a principal residence has on an annual basis — even in the year of sale.”

What deductions apply in the year of a sale?

“This might come as a shock,” says Schippa. “There isn’t really, technically a ‘deduction,’ when you’re selling your personal residence.”

The deductions for a home the year of a sale are the same as any other year.

“There is literally no deductible expense that a seller of their principal residence can take that’s any different from when they were living in and owning the home,” Schippa explains, “They can deduct only prorated mortgage interest and property taxes.”

However, there are allowable exclusions on the proceeds from the sale of a principal residence, which we’ll address in a minute.

Are home repairs deductible?

Whether the homeowners are filing yearly taxes while living in the home or after a sale, the short answer is no.

“The IRS Code 262(a) says the amount of taxpayer spending for repairs, and upkeep is a nondeductible personal expense from which a taxpayer derives no tax benefit,” Schippa explains.

So, maintenance costs such as painting, yearly HVAC inspection, lawn mowing kid or service, and replacing a toilet are considered personal expenses, which are non-deductible.

Can I apply depreciation?

“Residences are a personal asset, and depreciation is a business deduction on an income-producing asset,” says Schippa.

For example, if you make repairs to a rental property, they could potentially be deductible or depreciable.

However, personal residences don’t depreciate, so deductions cannot be claimed through the Modified Accelerated Cost Recovery System (MACRS).

Taxes on the sale of a primary residence are calculated differently.

How does the IRS tax a home sale?

Taxes are based largely on the amount of capital gain — the profit the homeowner makes after the cost basis (the sellers’ total investment in the home) is deducted from the sales price.

Beyond that, “There’s a simple principle that’s kind of a bombshell,” says Schippa. “Section 121 Exclusion grants the sellers of a personal residence the ability to exclude up to $500,000 of gain from being taxable if they are filing jointly or up to $250,000 if the taxpayer is filing individually.”

Those exclusions apply regardless of the tax bracket. The main condition is: The sellers must have lived in the house two out of the last five years.

So, Schippa says, “To benefit from the exclusion, you don’t have to necessarily be living in the home when you sell it.”

To explore the way the exclusion works, let’s say your friends are a married couple in their 40s, who are selling the house they bought 15 years ago for $200,000.

They’ve been living abroad for the last two years and renting the property. But, now, they’ve decided to relocate to London permanently.

With the improvements they’ve made over the years, they’ve got a basis of $300,000.

Because they’re working with a knowledgeable HomeLight real estate agent, the property sells for $700,000. That means their $400,000 gain is non-taxable.

Likewise, you’re helping an elderly aunt sell her house, so she can transition to yours or a retirement community. She bought the house for $35,000 in 1960 and put on an addition in 1980 for $35,000.

Your aunt has kept a meticulous, well-maintained home, and millennials are eager to snap up any available property in her neighborhood.

Her agent says $15,000 in updates could increase the home’s value by $50,000 and result in a sale of around $150,000.

Because you’ve confirmed the Realtor®’s calculations by using HomeLight’s home value estimator, you’re not surprised when the house closes at $152,000.

Now, your aunt has great cash flow to cover her move. Even better, there’s no tax implication. Her gain — $67,000 — is not taxable because it does not exceed $250,000.

You can only exclude home sale profits from capital gains tax once every two years.

How Much Will I Make Selling My Home?

With HomeLight’s free Net Proceeds Calculator, you can estimate the cost of selling your home and the net proceeds you could earn from the sale.

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What happens if the capital gain totals more than the Section 121 exclusion?

On the tax return, capital gains appear on Form 8949 or Schedule D.

“The typical taxpayer will pay no more than a 20% tax on gains exceeding the tax-exempt $250,000 or $500,000,” says Schippa.

So, if your friends sell that same house for $1 million, they’ve got a $700,000 gain.

IRS Code Section 121 allows them to exclude $500,000; however, the remaining $200,000 gain is taxable. It could cost them up to $40,000 — unless they have receipts for eligible expenses to add to their cost basis.

Is there a way to reduce the tax burden on the taxable part of the proceeds?

Homeowners can reduce the taxable portion of their capital gains — profits that exceed the tax-exempt threshold — by adding the cost of substantial home improvements made during the entire time of ownership to their cost basis.

Small home repairs cannot be applied to reduce the tax burden.

However, looking at your friends’ $700,000 gain, suddenly the receipt for a $15,000 roof replacement that hadn’t been added to their basis becomes very important.

Once it’s added to the basis, the $200,000 gain goes down by $15,000. Subsequently, they save $3,000 (20% of $15,000) in taxes just with that one receipt.

What’s the difference between a home repair and a home improvement?

In terms of the expenses that can be added to the cost basis to decrease capital gains in home sales, home improvements are generally eligible; home repairs typically are not.

Typically, “A repair is more attributed to maintenance,” Schippa says. “An improvement is attributed more to some substantial addition to the house or substantial repair or betterment.”

However, sometimes, repairs can rise to the level of improvement.

Impressed by the profit your aunt realized and her happiness with her new living situation, her brother — your uncle — asks you to work the same magic, so he can move. The property values in his neighborhood are also skyrocketing.

His house and lot are large. He hasn’t done much upkeep since he retired. Since he’ll be living in the house until it sells, he’s nixed the idea of a full renovation. But, he will let you make repairs, so the house is more attractive to buyers.

You turn the stoop into a wrap-around porch, install crown molding, replace the shutters, upgrade the security system, replace the stairs, replace the cabinet doors, improve the yard’s hardscape to increase accessibility, drainage, and curb appeal.

In three months, you’ve hired eight different contractors and spent a total of $22,000.

Lightning strikes twice and you sell the home your uncle bought for $80,000 for $350,000. While $250,000 of the profits are non-taxable, the remaining $20,000 is.

However, if you kept the receipts, you can capitalize the $22,000 in expenses. Then, all the funds become a non-taxable gain.

“Individual small repairs cannot be added to the cost basis,” Schippa explains. “but a series of aggregated small repairs that result in an improvement over time might be considered.”

So, again, you emerge from the closing as the family’s real estate hero.

Are there any other expenses that can decrease the taxable amount in addition to the capital gains exclusion?

Another way to increase the cost basis and decrease tax burden over the threshold is through other eligible expenses.

As far as the costs involved in the sale of the home, some can be used to reduce capital gains.

In general, many of the closing costs and agent commissions can be used to reduce capital gains.

However, most marketing expenses are excluded.

Some typical kinds of expenses that can be capitalized include:

• Closing costs including broker commission
• Abstract fees (abstract of title fees)
• Charges for installing utility services
• Legal fees (including fees for the title search and preparing the sales contract and deed)
• Recording fees
• Survey fees
• Transfer or stamp taxes
• Owner’s title insurance

Some expenses that do not reduce capital gains include:

• Staging
• Marketing
• Yard signs
• Photography
• Moving expenses
• Any costs of repairs or maintenance (fixing leaks, replacing broken hardware, etc.) that are necessary to keep your home in good condition but don’t add to its value or prolong its life
• Any costs of any improvements that are no longer part of your home (i.e., wall-to-wall carpeting that you installed but later replaced)
• Any costs of any improvements with a life expectancy, when installed, of less than 1 year

Where can I go to find out specific items that can be added to cost basis?

Visit your new best friend — IRS Publication 523.

It’s a great reference for finding out whether particular items (solar panels, fixing/replacing a carbon monoxide detector, etc.,) can be deducted from capital gains.

In addition, “Publication 523 has nice little worksheets and lists of the various expenses that are lists of items,” Schippa says. “It can help taxpayers figure out the questions they need to ask their preparer.

What’s the best way to make sure I’ve made the most of eligible items in my cost basis?

Really the best way to minimize your tax burden and maximize your profit potential is to work with a local tax preparer.

“One tax preparer’s repair is another professional’s improvement,” says Schippa.

“Two tax professionals in the same city — or office — may apply the code very differently,” he continues. “Depending upon their perspective, how aggressive they are, the discussion with the client. And, they can both be right.”

Because there’s frequently a lack of consensus, some issues have been resolved in only case law.

In addition, each state has its own regulations regarding the taxation of gains from the sale of a home. That’s why it’s important to consult with a local tax professional for a complete picture of your tax profile.

However, you can always profit from understanding these simple truths about the complex IRS codes.

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It’s a common scenario. You live in your dream house, but the mortgage is high, and it’s a stretch to make that payment every month. Your credit cards are maxed. And because this house is your most valuable asset, you’re wondering, “Should I sell my house to pay off debt?”

Selling your house to pay off debt isn’t an uncommon solution, but putting your home on the market isn’t an easy choice either.

Before you decide to sell your house to pay off debt, take caution, and spend a few minutes reading this advice from top financial advisors and real estate agents. Here’s how to decide if you should sell your house to cover debt in 2022.

Start by determining why you’re in debt

Debt is incredibly common in the United States. In fact, according to a CNBC report, the average American holds $90,460 in debt.

That means it’s not uncommon to feel stressed about debt. However, while selling your house might be the right move, it’s not a quick fix. Before you decide to sell your home to get out of debt, determine the underlying reasons you’re in debt and the type of debt you’re holding.

“A lot of time it depends on the type of debt you have,” explains Sunny Wang, president and financial advisor at Essence Wealth and Insurance Services in Santa Clara, California. “When I advise clients, I look at what type of debt they have, how much, and what the interest rate is they’re paying on the debt.”

There are a few common reasons you may be in debt:

You bought more house than you could afford

In this case, when you bought the house you’re living in now, based on your credit score and income, you qualified for more than you thought you could afford. So you took it. Maybe you picked up a bigger house, a pool, or that five-car garage you wanted for years. A lot of people buy more house than they can afford just because they are approved for it, and their financial circumstances change later on–leaving them with high debt.

You struggle with money management

Many people follow a simple financial philosophy: If you want it, you buy it. Unfortunately, if you’re not managing your money, it’s easy to find yourself in debt.

In this case, if you have tons of debt and you think that selling your house will make your debt problem disappear, you should rethink your plan. Yes, selling your house could wipe out this bout of debt, but if you don’t correct your spending and planning habits, you’re bound to end up in the same situation a year or two down the road–only next time you may not have any housing assets to get you out of it.

If you need help with money management, consider using You Need a Budget (YNAB), a popular personal budgeting program, trying Mint, a free, web-based personal finance service, or talking to a financial advisor.

“There are a lot of moving parts, and there are strategies that people may not be aware of,” says Wang. “So I think it’s always wise to talk to a professional about it–a financial advisor that specializes in holistic planning.”

You had an emergency

Everything from car problems to health scares can put a person in debt. Unfortunately, many people simply don’t have the funds to pay for an emergency. In fact, a YouGov survey found 49% of Americans don’t have the cash to cover a $400 emergency expense.

If you don’t have problems managing money but have found yourself in a sticky debt situation, selling your home might feel like the only option. However, it’s another instance when you should tread carefully.

Ask these questions before you sell your house to pay off debt

Once you understand the underlying causes of your debt, it’s time to ask a few questions about your property and the real estate market in the area to assess whether selling off your house to pay off debt is the right approach. Here’s what to ask yourself:

How much will you make on the sale of your home?

Just because you own a house doesn’t mean you’ll make money when you sell it. Your home sale proceeds are based on how much of a down payment you laid out at the beginning, how much you’ve paid off on your loan, and the projection of what your home is now worth.

Whether you’re a year or 10 years into paying off your mortgage, it doesn’t make a difference when selling your home. The trick is knowing exactly how much you still owe, so you can make sure the sale of your current home pays off the remainder of your mortgage.

To find out, contact your lender or servicer and request your payoff amount. The payoff amount is the total you’ll have to pay to satisfy the terms of your mortgage loan, including any interest you owe until the day you plan to pay your loan in full.

The payoff amount is not the same as your current balance, which will appear on your most recent account statement and may not include interest.

If your home is worth less than the outstanding balance on your mortgage, things become more complicated, and selling your house to pay off debt simply won’t be feasible.

But it could be the opposite case. Say, you bought your house during a market crash and you got it for a steal. You put 20% down, and you’re quickly paying down the mortgage. An appraiser comes out and estimates your home is now worth double what you paid for it. Because it’s worth more now, you have more home equity.

It’s also important to know that, although there is a payoff at the end, selling your house is not a free process. For instance, closing costs are made up of points and lender fees, third-party fees, interest, taxes, insurance accounts, and escrow account funds. These fees differ by location and loan, but they tend to around 1% – 3% of your sale price.

“Mortgage companies, banks, they all really vary in products, rates and fees,” says top agent Rebecca Carter, who sells homes 47% faster than the average Knoxville agent. “I always advise people to talk to at least three and get an idea of what they can offer and what it’s going to cost you.”

If you need help estimating costs, Bank of America provides a step-by-step guide explaining how to calculate your current home equity. From there you can calculate your home sale proceeds.

How high is the rent in your area?

If you’re in debt, having a mortgage looming over your head can feel like it’s too much to handle. For this reason, renting a house may be more appealing. But before you take that step, consider the cost of renting in your area.

“When selling the home, you need to remember that you have to rent,” Wang explains. “There’s still an expense there.”

The costs of renting and owning a house will depend on the market and your local area. According to a recent Realtor.com study, the costs of monthly rent are lower than the costs of buying a home in 38 of the US’s 50 biggest metro areas. However, the same study saw median rent in those same most popular metros spike to record highs in June.

It’s a good idea to do city and area-specific research before determining whether buying or renting is better for your location and situation.

Are you prepared to move out of your house?

So you’ve done the math and determined that selling your house could, in fact, help you pay off debt. Oftentimes, a seller will still feel so attached to their home that moving would be emotionally devastating. If this is the case, it’s a good idea to talk to a finance professional about the other options on the table to pay off debt.

“They should definitely talk to a professional about it to look at their overall finances,” says Wang. “Sometimes it’s not as simple as, ‘Okay, I’ve got to pay off my debt. I have to sell the home.’ There may be resources they have that they can tap into and they’re not aware of.”

Some options may include:

• Cutting back on spending and creating a budget
• Halting credit card spending
• Selling off household items you no longer need
• Asking a family member for a loan
• Contributing less to your 401K
• Debt consolidation

2022 economic conditions and selling to pay off debt

Before you sell your house to pay off debt, it’s smart to consider the current housing market and economic conditions. Last year, the housing market was extremely hot. In fact, 98% of real estate agents labeled 2021 as a seller’s market. However, in June of 2022, home sales pulled back 5.4% to hit their lowest point since June of 2020. And with inflation recently hitting historic highs and mortgage rates increasing, home sales could slow even more in 2022.

Additionally, Bank of America economists recently said to expect a recession in 2022, so sellers may also want to consider how a dampened economy might impact their finances.

Prior to selling, it’s smart to dig into all of your finances, keep a close eye on the housing market, and weigh all of your options. Still, even though the market may be cooling off, Wang says if you decide to sell, you don’t necessarily need to slash your listing price. And in some areas, home prices may stay steady even if recession sets in over a long period.

“You can still sell your home right now and get a decent price,” Wang explains. “It’s not as high as before. We’re not at the peak anymore, but I see that people still sell at a decent price–especially if your home is in a really good location. Those home prices don’t go down much, even through recessions.”

In all cases, it’s also important to consider taxes if you’re thinking about selling your home to pay off debt. If you’re selling your house for a profit, you may be on the hook for capital gains taxes. However, if it’s your first home and you meet a few other simple qualifications, you may be able to avoid capital gains taxes up to $250,000 if you’re single and up to $500,000 for couples under a Sale of Home Tax Exemption. Either way, it’s a good idea to talk to a financial professional before you sell your house to pay off debt.

The risks of selling your house to pay off debt

Selling your home to get out of debt may seem like a great idea in theory but the risks are large, and whether it’s beneficial depends on both the circumstance and the person making the decision.

One danger is that it could be harder to qualify for a home if you want to buy again. If your house hasn’t been foreclosed on, it’s already yours, which means you don’t need to qualify further. If you choose to sell, and rent for a while because of debt, and you have poor credit, you may find it difficult to qualify for a loan to buy again.

Also, downsizing your home could cut down on your monthly payment, but it might not. This depends on the area, the maintenance involved in the new place, homeowners’ association costs, and cost of utilities. Be sure to look at the whole picture.

Overall, it’s best to be realistic. Your best selling price is what you and your real estate agent determine based on timing, comps, and house features. Don’t overestimate what your home is worth. Just because you’re ready to sell, doesn’t mean that market conditions are in your favor.

Next steps to selling your house to pay off debt

Here’s your to-do list before you decide to sell you home to get out of debt:

• Determine why you’re in debt and speak to a financial professional.
• Answer key questions about selling and renting in your area.
• Note the possible perils and expenses of selling.

The answer is not black and white, but between ample information and a good real estate agent who knows numbers, you can determine whether the best path for paying down your debt is a home sale.

Connect with a Top Agent to Help Maximize Your Home Sale

If you’re selling your house to pay off debt, working with a top agent can help. HomeLight data shows that top real estate agents statistically sell houses faster and for more money than average agents.

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Unforeseen circumstances can precipitate a move sooner than expected. The most common reason for selling a house after one year is job relocation, according to Brad Gore, a top agent who works with 74% more single-family homes than the average Branson, Missouri, agent. Other reasons can include:

• A health issue
• A family emergency
• A financial crisis
• A change in circumstance, such as a divorce or death in the family
• Buyer’s remorse – when the house just isn’t right for you

Unexpected situations signaling the need to move within a year of purchasing a home can prompt questions: “Has my home appreciated enough that I will make a profit … or break even?” or “Can I sell a home after owning it for one year?”

You can sell a home whenever you want, but expect financial consequences if you have little equity in it. Don’t forget all the fees associated with selling a house – and the potential for owing capital gains tax.

These are all considerations that form the basis of the proverbial “5-year rule” for selling a house.

How Much Is Your Home Worth Now?

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What is the 5-Year Rule for selling a house?

The 5-year rule is pretty self-explanatory. Generally, the longer you keep your house, the more likely you are to make a profit when you sell it. Those who sell their property before owning it five years risk losing money on their investment.

There are a number of reasons for this, including lack of equity accumulated in the home and insufficient appreciation – an increase in property value.

Appreciation derives from a variety of factors, some of the most common of which include:

• Location: Some parts of the country are more attractive to homeowners. Cities offer many amenities – although some buyers prefer a quieter, more rural setting. Nevertheless, proximity to employers, restaurants, shopping, and other attractions can enhance a community’s value … as well as that of your home. Being adjacent to parks and green spaces can add 8%-20% higher value. Low crime rates and good schools can add value. Some HOAs can, as well.
• Supply and demand: Inventory is at an all-time low, resulting in prices rising about 20% in just one year. Low interest rates and changes in work habits (with the rise of remote work due, in part, to the pandemic) contributed to the seller’s market (according to a HomeLight Q1 2022 survey) we’ve been experiencing. There are signs that the market is now cooling as interest rates are on the rise. All this impacts appreciation of existing homes.
• Comparable properties nearby: Known as real estate comps, recent nearby home sales affect the sale price and value of your home. In a seller’s market, prices typically rise, which could effectively boost equity in your home and increase appreciation.
• Size and usable space of your home: Numbers don’t lie, but they may not tell the whole story, either. If you have built a home addition or finished an attic or basement, that’s more usable square footage that can make your home worth more. Accessory Dwelling Units (ADUs) such as a detached mother-in-law house have been known to add as much as 38% value.
• Age and condition of your home: An appraisal provides a good assessment of your home’s general condition. Age does not necessarily detract from your home’s worth, as long as quality materials and building practices were used and the home has been renovated or at least properly maintained. Gore advises homeowners to keep their homes in good condition. “Fix things. Don’t give buyers a reason to chip away at your asking price.”
• Upgrades and updates: Even though homes are built to last, changing trends can necessitate a remodel. Kitchens and baths remain the most popular rooms to upgrade – as well as the most expensive. Just be careful not to over-improve. If you know you’re going to be in the house only a short time, Gore recommends not doing major remodels. Smaller modifications such as fresh paint can add as much as 5% to a home’s value and allow you to keep cash in hand for your move.
• Health of the economy: With inflation comes rising home prices. Conversely, prices typically drop during a recession.

The latest average appreciation rate in the U.S. is currently around 15.7%, according to the National Association of Realtors. That’s up from a rate of 14.3% a year ago. In comparison, it was only 4% in 2019.

How can I find out what my home might be worth now?

No matter how long you have lived in your home, it’s important to know what the property is worth in order to make wise decisions about selling.

Find out what your home might be worth by using HomeLight’s Home Value Estimator. This free tool uses your property information and local housing market data to deliver a preliminary home value. It’s a great starting point to get a ballpark estimate of your home’s worth, but for a detailed evaluation, we recommend getting a full comparative market analysis from a top real estate agent.

Contact an experienced agent to put together a comparative market analysis. They compare your home’s features, size, location, age, condition, and other details with those of similar properties in your area that have recently sold. This provides a timely snapshot of your home’s market value.

You could also contact a professional appraiser to get a more accurate valuation. An experienced, licensed, and certified appraiser performs an even more in-depth assessment of your home against verified recent home sales to really pinpoint its current value.

Can I sell my house after one year?

You can sell your house after one year. But, should you? Some very real personal or financial issues may be pushing you toward a sale. Just be prepared for potential drawbacks.

Drawbacks for selling a home early

You may find a significant downside of selling your home such a short time after purchasing it. “You’ll probably lose money,” Gore speculates. “At best, you might break even. Like any investment, you don’t get profit if you hold it a short time.”

Here are some of the common concerns you may face:

• Cost of mortgage interest: At the beginning of your loan, a bigger percentage of your mortgage payment goes toward interest. Therefore, you’re not accumulating much equity in the home if you sell too soon.
• Closing costs that add up: You paid these when you closed on this home, but you’ll probably have to pay them again if you sell it and buy another home. Expect them to run 1% to 1.5% of the loan amount.
• Moving costs you may not have planned for: Moving costs for a local move average $1,250. A long-distance move (of 1,000 miles) averages $4,890.
• Capital gains taxes: While you can often avoid paying this on the sale of a primary residence by claiming the capital gains tax exclusion, you may not meet the conditions set by the IRS if you live in the home less than two years. We’ll explore this in more detail below.

Options for if you’re facing a need to sell a home early

If you decide that selling your home doesn’t make financial sense after only one year, but you still need to move, there are other options you can explore.

• Rent out the home: If you need to sell but haven’t built up enough equity to cover all the drawback fees, one option might be to rent out your home and let it continue to appreciate. Be aware of hidden costs with this option, such as insurance and perhaps hiring a management company. Of course, there also may be some tax breaks, too. In a tourist market like Branson, Gore says, “You have the opportunity to rent it nightly, as an executive rental, or long-term. It’s not a bad way to go. You can build equity and lower your tax burden.”
• List your home as a vacation rental: Listing your home on vacation rental sites like Vrbo or Airbnb could produce some income until you’re ready to sell.
• Hold on to it: Try waiting out the market if prices are low – or, hold on to it until you return. Some of Gore’s clients keep their homes with the intention of retiring in them, or they may use them as a family vacation home.
• Choose a short sale: If you’re behind on your mortgage payments or owe more than the home’s current value, you may want to think about a short sale as a way to avoid foreclosure. It’s not an easy way out; there are many steps to take, and your credit rating will take a hit, but it’s a way out for some. It’s not something Gore ever recommends, though. “It’s never worth it. The penalty is much higher than people realize.”
• Consider foreclosure: When all other options have been exhausted and you’re still in dire straits, foreclosure might be the only way out.
• Auction: If your home is paid off and the market is peaking, Gore believes auctioning it off “is not a bad way to go.” Just be sure to set a reserve price. If bids don’t meet it, he points out that you can always list it with an agent.
• Use a top agent to price it right: Pricing your home to sell may reduce the number of days on market (DOM) and allow you to cut your losses. You’ll need a knowledgeable agent familiar with your market to help guide you.

Keep in mind that selling your home at a loss can still incur tax obligations. In most cases, canceled – or forgiven – debt is considered taxable income. That can include a short sale, foreclosure, deed in lieu of foreclosure, or loan modification. Gore recommends forming a team, consisting of a real estate agent, your mortgage broker, and a CPA. “Tax issues are complicated,” he acknowledges. “It’s worth the cost.”

Only you can navigate the determining factors regarding whether you should sell your house after one year or come up with an alternate solution.

What happens if I sell my house after less than a year?

If your home has experienced significant appreciation, it’s possible to break even if you sell within a year of purchase. However, it’s more likely that you’ll have a loss.

“It’s not uncommon to sell after one year,” Gore says. In fact, the amount of time people keep their homes is contracting, with the average now at just seven years.

By selling after a year or less, you’re liable to incur expenses such as closing costs, moving costs, and capital gains. If you’re paying for the home with a typical mortgage, you will not have accrued much, if any, equity in that timeframe. You can check to see where you might stand with this amortization schedule.

Selling Sooner Than You planned? Connect With a Top Agent

No matter how long you’ve owned your home, connect with a top real estate agent. Our data shows that the top 5% of agents across the U.S. sell homes for as much as 10% more than the average agent.

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How much does it cost to sell my home?

To make money on your home sale, it needs to have appreciated in value more than the sum of all the selling fees you will accrue when moving.

Prep, staging, closing costs, inspections, real estate commissions, and other fees associated with selling your home add up. Expect to pay 9%-10% of the sale price.

A breakdown of the typical costs associated with selling can look like this:

• Staging and house prep fees (1%-4% of the sale price)
• The standard 5%-6% Realtor® commission fee for the sale
• Inspection and repair fees (varies)
• Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1%-3% of the sale price)
• A possible second set of closing costs if buying a new home
• Seller concessions (2%-6%)
• Overlap costs (1%-2%)
• Moving and relocation costs (varies)
• Mortgage payoff (varies)

To get a better idea of what you’ll have to pay at closing, turn to HomeLight’s Closing Costs Calculator. Plug in your information to get a free estimate of the fees you might incur when selling your home.

Gore works with an investor client who often buys homes at auction, which he fixes up and sells the following year. That allows him to bypass many of the typical transaction fees, reducing his costs to 1%-2% of the purchase price. For a $200,000 house, Gore’s client pays about $2,500 in fees. “Buying a short sale or foreclosure results in few fees,” Gore recaps, “but when you sell, there’s a significant jump in the fees you pay.”

For his client, those fees – including real estate agent commission, taxes, closing costs, and possibly more – total up to roughly 10%, or $20,000. That’s on top of the cost to fix up the properties.

Remember to factor in capital gains taxes

Your home is a capital asset in the eyes of the IRS. Therefore, when you sell it, the net profit is typically taxed. Calculating your tax debt is complicated – and becomes even more so if you sell a home after just one year, due to short-term capital gains tax.

Long-term capital gains tax

Under the capital gains tax exclusion, in the sale of a primary residence, the first $250,000 of profits (or $500,000 for a married couple filing jointly) is typically not taxed if you live in your home for at least two of the five years prior to the sale.

Any profit over and above that threshold is subject to taxation. While it’s unlikely that your home will have appreciated in value enough in a year or less to produce that kind of profit, you still may be required to pay taxes on the sale.

There are additional requirements to qualify for the capital gains exclusion, aka the Section 121 exclusion. Here are a few of the details about qualifying for the exemption:

• Length of time: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale. The two-year requirement doesn’t have to be continuous. It also does not have to be the two years immediately preceding the sale.
• Amount of the gain: If you owned and lived in the home for two of the past five years before the sale, then up to $250,000 of profit is typically considered tax-free. If your profit exceeds the $250,000 (or $500,000 for married, filing jointly) limit, the excess generally must be reported as a capital gain and taxes must be paid.
• Filing status: If you are single, the threshold is $250,000. If you are married and file a joint return, then up to $500,000 of profit is typically tax-free.
• Primary residence requirement: The law lets you exclude the profit from your taxable income as long as the home was your primary residence (lived in it for two of the five years leading up to the sale, and you haven’t claimed the exclusion on another home in the last two years.)

Short-term capital gains tax

If you are selling a home less than a year after you purchased it, it might cost you because the short-term capital gains tax is charged against you as normal income, as determined by your tax bracket.

For example, in 2022 there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If your household falls into the 15% bracket, and you made $75,000 on the sale of your home, you might be required to pay a short-term capital gains tax of $11,250.

If you owned your home for more than one year but less than two, the profit from selling it will be taxed at the lower long-term rate: 0%, 15%, or 20%, based on your capital gains tax bracket.

If you don’t meet all of the requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion – such as job relocation, health changes, or other unexpected circumstances.

Note: Selling a second home, vacation home, or any property that isn’t your primary residence can make you liable for capital gains tax up to 20%. This could come into play if you opt to rent your home before you sell it, although you can take depreciation for a rental.

Consult with a tax professional to examine your options when selling a home, especially if you have only owned it for just one year. “I wouldn’t relocate until I talk to a CPA,” Gore states.

Conclusion: Stay or go

Most of the time, it makes more sense financially to stay in your home for a few years. However, life sometimes gets in the way and you have to move sooner than expected.

That’s why it’s important to have a plan when you purchase a home regarding how long you expect to live on the property. If you’re currently facing a sale for relocation, before you purchase another home, ask yourself where you want to be in five or 10 years.

For most of us who are not real estate investors, the 5-year rule is still a good guide to help get the most out of a home when it comes time to sell. Of course, there are opportunities to achieve a good return on your home sale after owning a property for just one year.

Use HomeLight’s Agent Match to find a top agent to help strategize your next steps. No matter how long you’ve lived in your home, our data shows that the top 5% of real estate agents in the U.S. sell homes for as much as 10% more than the average agent.

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People are staying in their homes for shorter periods of time these days. The average length of home ownership has shrunk to just seven years, according to Brad Gore, a top agent who works with 74% more single-family homes than the average Branson, Missouri, agent.

Nevertheless, most people don’t plan on selling after only two years. It’s not an ideal situation … but it may be necessary.

Before you sell, there are some things to consider.

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1. What’s your reason for selling?

The most common reason for selling a house after two years is job relocation, Gore says. Other reasons can include:

• A health issue
• A family emergency
• A financial crisis
• A change in circumstance, such as a divorce or death in the family
• Buyer’s remorse – when the house just isn’t right for you

2. Do I have to follow the 5-Year Rule?

The 5-year rule states that the longer you keep your house, the more likely you are to make a profit when you sell it. Those who sell their property before owning it five years risk losing money on their investment.

Primary reasons for this include lack of equity accumulated in the home and insufficient appreciation – an increase in property value.

“The market is the largest driver of price,” Gore says. Price is one element in determining how much your home has appreciated. Appreciation derives from other factors as well, some of the most common of which include:

• Location: Some parts of the country are more appealing to homeowners. Cities offer many amenities, although some buyers prefer a quieter rural setting. Nevertheless, proximity to employers, restaurants, shopping, and other attractions can enhance a community’s value … as well as that of your home. Being adjacent to parks and green spaces can add 8%-20% higher value. Low crime rates and good schools can add value. Some HOAs can, as well.
• Supply and demand: With inventory at an all-time low, prices have risen about 20% in just one year – although Gore sees the market beginning to “level off,” meaning it’s “getting back to normal.” Low interest rates and changes in work habits (with an increase in remote work since the beginning of the pandemic) contributed to the seller’s market (according to a HomeLight Q1 2022 survey), but rates are rising as the market resets, impacting appreciation.
• Comparable properties nearby: Real estate comps are recent nearby home sales that affect the sale price and value of your home. In a seller’s market, prices typically rise, which could effectively boost equity in your home and increase appreciation.
• Size and usable space of your home: If you have built a home addition or finished an attic or basement, that adds more usable square footage that can increase your home’s value. Accessory Dwelling Units (ADUs) such as a detached mother-in-law house have been known to add as much as 38% value.
• Age and condition of your home: An appraisal is a tool to evaluate your home’s general condition. Age does not necessarily detract from your home’s worth, as long as quality materials and building practices were used and the home has been renovated or at least properly maintained. Gore advises homeowners to keep their homes in good condition. “Fix things. Don’t give buyers a reason to chip away at your asking price.”
• Upgrades and updates: Even if your home is built to last, changing trends can necessitate a remodel. Kitchens and baths remain the most popular rooms to upgrade. They’re also the most expensive. Just be careful not to over-improve. If you know you’re going to be in the house only a short time, Gore recommends caution. “Do things to increase the value, but think long-term,” he says, and don’t overdo. Small improvements are best. For example, fresh paint can add as much as 5% to a home’s value.
• Health of the economy: With inflation comes rising home prices. Conversely, prices typically drop during a recession.

The latest average appreciation rate in the U.S. is currently around 15.7%, according to the National Association of Realtors. That’s up from a rate of 14.3% a year ago. In comparison, it was only 4% in 2019.

3. Will I lose money if I sell after 2 years?

The bad news is, “you’ll probably lose money,” Gore says. “At best, you might break even. Like any investment, you don’t get profit if you hold it a short time.”

The good news is, at the two-year mark, you may qualify for the capital gains tax exemption.

Your home is a capital asset in the eyes of the IRS. Therefore, when you sell it, the net profit is taxed. However, the federal tax code allows you to claim a Section 121 exclusion if you live in the primary residence at least two of the five years prior to selling. That enables you to exclude $250,000 (individual filers) or $500,000 (joint filers) of profit from your capital gains tax liability.

There are additional requirements to qualify for this capital gains exclusion, aka the Section 121 exclusion. Here are a few of the details:

• Length of time: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale. The two-year requirement doesn’t have to be continuous. It also does not have to be the two years immediately preceding the sale.
• Amount of the gain: If you owned and lived in the home for two of the past five years before the sale, then up to $250,000 of profit is typically considered tax-free. If your profit exceeds the $250,000 (or $500,000 for married, filing jointly) limit, the excess generally must be reported as a capital gain and taxes must be paid.
• Filing status: If you are single, the threshold is $250,000. If you are married and file a joint return, then up to $500,000 of profit is typically tax-free.
• Primary residence requirement: The law lets you exclude the profit from your taxable income as long as the home was your primary residence (lived in it for two of the five years leading up to the sale, and you haven’t claimed the exclusion on another home in the last two years.)

If you don’t meet all of the requirements for the exemptions listed above, the IRS has special rules that may allow you to claim a full or partial exclusion – such as job relocation, health changes, or other unexpected circumstances. Consult with a tax professional to examine your options when selling a home you have owned for only two years. “I wouldn’t relocate until I talk to a CPA,” Gore states.

Note: Selling a second home, vacation home, or any property that isn’t your primary residence can make you liable for capital gains tax up to 20%. This could come into play if you opt to rent your home before you sell it, although you can take depreciation for a rental.

4. How can I calculate my potential loss?

These steps can help you find out if you stand to lose money by selling your home after two years:

• Get an estimate of your home’s value. HomeLight’s Home Value Estimator is free and easy to use, and is a great place to start. Just answer a few questions about your property to receive a preliminary value estimate.
• Deduct your outstanding mortgage balance and any costs of selling you incurred (such as real estate commission, closing costs, title fees, repairs, prep, and staging). You can also check HomeLight’s Net Proceeds Calculator. This free tool will provide an estimate of the costs of selling your home and the potential net proceeds you might earn.

Keep in mind that selling your home at a loss can still incur tax obligations. In most cases, canceled – or forgiven – debt is considered taxable income because the borrower “gains back” the amount they would have had to pay.

Forgiven debt can include a short sale, foreclosure, deed in lieu of foreclosure, or loan modification. If the lender cancels a debt on your primary residence, you may be excluded from any tax obligation. Check with the IRS Interactive Tax Assistant to determine if you have to include canceled debt on your income tax return.

Gore recommends forming a team, consisting of a real estate agent, your mortgage broker, and a CPA. “Tax issues are complicated,” he acknowledges. “It’s worth the cost.”

5. How do I find my home’s value?

No matter how long you have lived in your home, it’s important to know what the property is worth in order to make wise decisions about selling.

Find out what your home might be worth by using HomeLight’s Home Value Estimator. This free tool examines your property information and local housing market data to provide a preliminary home value. It’s a great starting point to get a ballpark estimate of your home’s worth, but for a detailed evaluation, we recommend getting a full comparative market analysis from a top real estate agent.

Contact an experienced agent to do a comparative market analysis. They compare your home’s features, size, location, age, condition, and other details with those of similar properties in your area that have recently sold in order to provide an accurate estimate of your home’s market value.

A professional appraiser can provide an even more accurate valuation. An experienced, licensed, and certified appraiser performs an in-depth assessment of your home against verified recent home sales to pinpoint its current value.

6. What are the costs I might incur when selling my house?

If your home has experienced significant appreciation, it’s possible to break even if you sell within two years of purchase. However, it’s more likely that you’ll have a loss.

When selling your home, you’ve got to consider expenses such as closing costs, moving costs, and capital gains. If you’re paying for the home with a typical mortgage, you will not have accrued much, if any, equity in that timeframe. You can check to see where you stand with this amortization schedule.

Here’s a breakdown of some of the costs you may incur:

• Cost of mortgage interest: At the beginning of your loan, a bigger percentage of your mortgage payment goes toward interest. Therefore, you’re not accumulating much equity in the home if you sell too soon.
• Closing costs: You paid these when you closed on this home, but you’ll probably have to pay them again if you sell it and buy another home. Expect them to run 1% to 1.5% of the loan amount.
• Moving costs you may not have planned for: Moving costs for a local move average $1,250. A long-distance move (of 1,000 miles) averages $4,890.
• Early pay-off penalty fee on the mortgage: “Some loans, like an ARM or a jumbo loan, have penalties for paying them off early,” Gore advises.
• Capital gains taxes: While you can often avoid paying this on the sale of a primary residence by claiming the capital gains tax exclusion, you may not meet the conditions set by the IRS if you live in the home less than two years.

Selling Sooner Than You planned? Connect With a Top Agent

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7. How much does it cost to sell my home?

To make money on your home sale, it needs to have appreciated in value more than the sum of all the selling fees you will accrue when moving.

Prep, staging, closing costs, inspections, real estate commissions, and other fees associated with selling your home add up. Expect to pay 9%-10% of the sale price.

A breakdown of the typical costs associated with selling can look like this:

• Staging and house prep fees (1%-4% of the sale price)
• The standard 5%-6% Realtor commission fee for the sale
• Inspection and repair fees (varies)
• Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1%-3% of the sale price)
• A possible second set of closing costs if buying a new home
• Seller concessions (2%-6%)
• Overlap costs (1%-2%)
• Moving and relocation costs (varies)
• Mortgage payoff (varies)

To get a better idea of what you’ll have to pay at closing, turn to HomeLight’s Closing Costs Calculator. Plug in your information to get a free estimate of the fees you might incur when selling your home.

8. What other options do I have besides selling?

If you decide that selling your home doesn’t make financial sense after only two years, but you still need to move, there are other options you can explore.

• Rent out the home: If you need to sell but haven’t built up enough equity to cover all the fees, one option is to rent out your home and let it continue to appreciate. Be aware of hidden costs with this option, such as insurance and perhaps hiring a management company. Of course, there also may be some tax breaks, too. In a tourist market like Branson, Gore says, “You have the opportunity to rent it nightly, as an executive rental, or long-term. It’s not a bad way to go. You can build equity and lower your tax burden.”
• List your home as a vacation rental: Listing your home on vacation rental sites like Vrbo or Airbnb could produce some income until you’re ready to sell.
• Hold on to it: Try waiting out the market if prices are low – or, hold on to it in case you return someday. Some of Gore’s clients keep their homes with the intention of retiring in them, or they may use them as a family vacation home.
• Choose a short sale: If you’re behind on your mortgage payments or owe more than the home’s current value, you may want to think about a short sale as a way to avoid foreclosure. It’s not an easy way out; there are many steps to take, and your credit rating will take a hit, but it’s a way out for some. It’s not something Gore ever recommends, though. “It’s never worth it. The penalty is much higher than people realize.”
• Consider foreclosure: When all other options have been exhausted and you’re still in dire straits, foreclosure might be the only way out.
• Auction: If your home is paid off and the market is peaking, Gore believes auctioning it off “is not a bad way to go.” Just be sure to set a reserve price. If bids don’t meet it, he points out that you can always list it with an agent.
• Use a top agent to price it right: Pricing your home to sell may reduce the number of days on market (DOM) and allow you to cut your losses. You’ll need a knowledgeable agent familiar with your market to help guide you.

Conclusion: Can you do it in two?

When selling your home, “everything changes at two years,” Gore says, primarily due to the capital gains tax exemption. Nevertheless, it’s extremely difficult to make a profit on your home in such a short time. That’s why he advises his clients to make a net sheet and consult a CPA.

Gore’s other advice is to build a team consisting of a CPA, your mortgage broker, and a real estate agent. This team can advise you of the best strategy in your situation and your market.

Use HomeLight’s free Agent Match platform to find a top agent to help strategize your next steps. No matter how long you’ve lived in your home, our data shows that the top 5% of real estate agents in the U.S. sell homes for as much as 10% more than the average agent.

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According to New York real estate attorney and founder of The Donaldson Law Firm, Stephen Donaldson, “the cost of retaining an attorney compared to the purchase price of an average home is usually nominal, at best.”

“For example, in downstate New York, even when a home is purchased for $350,000, a legal fee of $1,750 represents an additional cost of only 0.5%,” says Donaldson. “The majority of home buyers would not dream of purchasing a home without investing a few hundred dollars in a home inspection to make sure [they know the repair status of a home],” he says. “The same perspective should apply to retaining a real estate attorney to make sure no one attempts to pull the wool over their eyes.”

In this guide, you’ll learn how much real estate attorneys cost, the services they perform, and whether or not you need one.

What do real estate attorneys do?

Real estate attorneys possess the education, expertise, and licensure to prepare, review, negotiate and dispute important legal documents and issues related to the acquisition or sale of a property. Upon reviewing documentation, an experienced real estate attorney advises parties of matters that might need addressing and amending for the best interest of their client.

Some of the documents attorneys handle include:

• Purchase agreements
• Title reports
• Inspection reports
• Closing and transfer documents
• Mortgage documents
• Property taxes
• Property liens
• Estate planning paperwork

“Sellers rely on real estate attorneys for the same reason airline passengers rely on pilots to get them where they want to go,” says Donaldson. “While the passengers know that they want to get from point A to point B, they lack the training, skills, and experience to fly the plane, communicate with the air control tower, anticipate weather conditions, etc.”

Services real estate attorneys provide for sellers

Real estate attorneys provide sellers with a menu of services, depending on their needs and the state where they reside. These may include:

• Drafting and revising contracts
• Placing earnest money deposits into escrow
• Reviewing title reports
• Helping to clear title issues
• Drafting deeds
• Reviewing loan documents
• Drafting and reviewing inspection contingency clauses and appraisal contingencies
• Negotiating inspection requests
• Obtaining a Certificate of Occupancy (CO)
• Handling payoff and discharge paperwork for lien issues
• Reviewing settlement statements
• Reporting the sale to tax authorities
• Drafting amendments for attorney review

How much do real estate attorney fees cost?

The cost for real estate attorney fees is based on geographic location, the attorney’s level of experience, type of services rendered, and the complexity of your real estate transaction.

Real estate attorneys charge $150 to $350 per hour, although some can bill up to $500 or more. They might also charge a fixed fee for preparing closing documents. Although some attorneys bill by the hour, Donaldson says it’s more common for attorneys to charge a flat rate.

“The vast majority of residential real estate transactions are performed on a flat or fixed rate basis, typically between $1,200 on the low end to $3,000 on the high end, depending on the type of property and any other special circumstances, for example, when the sale involves an estate.”

When sellers might need a real estate attorney

“Sellers get a bang for their legal buck because a good attorney helps to mitigate unwanted circumstances that could end up costing sellers unnecessary costs,” explains Donaldson. If you’re a seller, the following common and uncommon scenarios might warrant having a real estate attorney in your corner.

You agree to finance the sale of a property

“One out of the ordinary issue that arises, albeit infrequently, is when a seller offers to finance the sale of property, meaning the seller is also acting as the lender,” says Donaldson.

“In that scenario, the buyer signs a promissory note and mortgage over to the seller rather than to a bank; if a seller is going to go down that road (and you see it more commonly with distressed properties that have been on the market for a while) the seller absolutely needs the help of an attorney to make sure the note, mortgage, and any other closing documents are as airtight as they can be from a legal perspective.”

When you offer a concession to the buyer

“Another extraordinary issue is when the seller offers a concession to a buyer,” Donaldson explains. “This means that [the buyer] will agree to a specific purchase price but the seller will also allow a concession of several thousand dollars to help the buyer finance their closing costs,” he says. “For example, the seller will agree to accept $50,000 down on a $500,000 sale and also allow a $10,000 concession. Because the amount of the concession is in the contract, this allows the buyer to apply for a loan of $460,000 rather than $450,000, and the additional $10,000 is applied toward closing costs.”

“On its face, it seems straightforward,” says Donaldson, “however, a seller should rely on the guidance of an experienced real estate attorney to make sure the concession provision is worded [in a way] so the buyer’s lender does not reject it, that the seller does not end up paying a transfer tax on the $10,000 concession.”

You’re selling an inherited property

Sellers can sometimes have a difficult time selling property they’ve inherited. Jeffrey L. Nogee, a New York City-based attorney, recalls a time when a deal fell through when he asked the seller for copies of co-op ownership documents.

“No one had done probate work on the estate and the son’s assurances that he was the only living heir wasn’t enough [from a legal standpoint] to allow the deal to continue.”

You’re selling a house from out of state

Selling a house from out of state — or overseas — can get tricky. Steven B. Herzberg of Vazquez & Associates in Miami, Florida, has needed to execute documents through notaries, often in home countries that required translation.

“This required reviewing local and international laws and working with the buyer’s underwriters to get approval to sign documents outside of the standard means.”

You’re selling a house with a lien

Liens recorded against your property can appear on your title for various reasons, including unpaid taxes, an unpaid mortgage, and unpaid contractor bills. If you need to dispute or negotiate the debt, a real estate attorney can be helpful.

Your home is in foreclosure or a short sale

If your home is in foreclosure, a real estate attorney can work with your lender or the bank to approve a short sale before you lose your home by:

• Helping you file for bankruptcy
• Gather the proper documents to prove financial hardship
• Representing you at a foreclosure auction
• Navigating short sale documents
• Explaining whether your remaining debt will be forgiven, taxed, or needs to be paid

You’re going through a divorce and need to divide the proceeds

Going through a divorce comes with a set of complicated stipulations. Although an agent might have experience representing a seller who has gone through divorce, and can offer some guidance, an attorney can inform you from a legal standpoint about your state’s property division laws.

Your house has structural issues

Each state has its own specific guidelines about disclosing structural issues such as settling and sinking foundations. While a real estate agent will advise you to disclose the issue, a real estate attorney can clear up any specific legal concerns and inform you of your state laws to help reduce the risk of litigation.

What states require a real estate attorney?

Check with your state to learn  if they require an attorney for your sale because laws differ from state to state. While some states like New York require an attorney be present at closings, others require a lawyer to review the title, and some states don’t require an attorney at all, although your real estate agent might recommend one.

“In the South, there are a lot of people that still believe in making deals with a handshake or on the back of a napkin,” says Teresa Cowart, a top-selling real estate agent in Richmond Hill, Georgia.

“I hate to see people get into situations where they’re potentially putting themselves at risk and liability.”

How to find a great real estate attorney

The first place to look for a great real estate attorney referral is through your real estate agent or your agent’s brokerage. They may be able to provide you with a few names of attorneys they’ve worked with in the past they would be happy to recommend.

You can also reach out to family and friends, but if your search comes up dry, you can find real estate attorneys online where you can read reviews from past clients. The following websites make a good starting point:

• Your state bar association website can point you to referrals near you by entering your zip code.
• Avvo publishes attorney reviews for 97% of practicing lawyers in the United States.
• FindLaw is a search engine database to find lawyers based on location. The site also provides valuable resources about state laws.

After locating a few attorneys (as a rule of thumb, speak to at least three), ask insightful questions to get a sense of the attorney’s experience, personality, and professional style.

Why hire a real estate attorney?

“If you hire an attorney, hire a real estate attorney,” recommends Donaldson. “While you may have had a positive experience with the family law attorney who handled your divorce, look for an attorney who works almost exclusively in the area of real estate when you’re selling,” explains Donaldson.

“You also want someone who works in the area in which the property is located rather than someone who has an office in the same state but a few hundred miles away where the local customs may be completely different compared to the area where you’re selling.”

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Sometimes, it’s a chance to go in on a rental property when you can’t afford to do so alone, or maybe you’re buying that vacation house with friends that you always dreamed of.

But selling a house with multiple owners can be a nightmare scenario if it isn’t planned out. And if everyone involved isn’t aligned from the start, you can end up disagreeing on important details when it comes time to sell — potentially wrecking the sale and wasting all of the owners’ valuable time.

Fortunately, there are ways to set up a smooth sale on a co-owned property. In this guide, we dive into some of the different types of co-ownership scenarios you should know about, look at the advantages and disadvantages of each, and lay out tips from the pros on selling a house with multiple owners.

Find a Top Agent to Help Navigate Your Sale

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Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to a  local professional regarding your specific situation and the applicable laws in your state. 

Who may be selling a house with multiple owners?

Before you decide to go forth with selling a house with multiple owners, it’s important to understand what type of ownership category your home falls into. Each type of ownership carries unique advantages, disadvantages, and considerations. Here are a few of the most common types of home co-ownership scenarios, along with how each situation could affect your sale:

Tenancy in Common

A tenancy in common is one situation where multiple people can own the same home. With tenancy in common agreements, you typically can establish as many owners as you want, and they don’t need to split the investment equally. You also don’t have to be married to enter into tenancy in common.

One important thing to think about if you’re considering a tenancy in common is that most of the time you won’t have rights of survivorship – which means that if one of your co-owners dies, their share of the property is passed on to their heirs. This can quickly turn into a tricky situation as you may end up sharing a property with a person or with people you don’t know all that well.

Tenancy in common can be a good option for multiple owners who want to split responsibilities or divide up ownership. It’s also a solid way to set up fair ownership expectations for people who plan to contribute unequal amounts of money into the property.

You can also typically buy out a share of property under a tenancy in common agreement fairly easily. “If you have two people on the deed and they come to an agreement and say, ‘Hey, I want to buy you out,’ that’s very simple,” explains Steven B. Herzberg, a real estate attorney at Vazquez & Associates in Miami, Florida. “All you do is come to your terms, transfer funds, and that person signs a deed of their interest to the other person.”

However, if you’re selling a property that’s listed as a tenancy in common, it’s critical you pin down who owns what portion of the property, who is responsible for costs, and any other home ownership details long before you list the house for sale.

“Problems arise when there are disputes and they haven’t been thought of before: someone put down 30% of the down payment, someone else put down 70%, but in reality, they’re just listed as tenants in common.”

Herzberg says the best way to avoid headaches when it comes time to sell is to craft an agreement stating exactly who owns what. It’s also critical for all of your tenants in common to agree to the sale overall. That’s because you’ll need all of the owners to be available to sign over the deed.

Joint Tenancy

With joint tenancy, multiple owners end up sharing equal ownership rights. That means, even if you contributed more to the property than your housing partner, you’ll split ownership evenly. Herzberg says this is a path he often recommends for people who are engaged or are siblings because if one owner is incapacitated, the process is fairly simple.

“If something happens to one person, full ownership goes to the other owner,” he says. “It doesn’t go through probate because the deed basically transfers 100% of one person’s interest to the other person’s interest.”

This ownership advantage also makes joint tenancy a popular choice for parents who want to co-own a property with their children. That’s because you don’t need to worry about probate court if one owner dies. Herzberg says that this clean process makes joint tenancy attractive for owners who are related or in a close relationship.

“The title automatically transfers down,” he explains. “It’s a good way to avoid the cost and time of probate, and for people who are not legally married but are committed — whether they’re in a committed relationship or family — that’s typically the way they want to hold title.”

However, if you’re selling a house with multiple owners under a joint tenancy, you may run into problems if you have any ownership gray areas. For instance, if one owner feels they put more money into the property or deserves more of the final sale’s income, it could end up disrupting your sale.

“That’s what people typically forget about but should think about when they purchase the property,” warns Herzberg. “They should enter into agreements about what each person owns, who’s putting in what, what happens if one person wants to sell, and what to do if something happens to one of the people.”

As long as you’ve settled any potential disputes before listing your home, selling your house with multiple owners under joint tenancy is fairly straightforward. Just remember, everyone will need to agree to the sale or sign a transfer in order to sell. Also important to remember that your state may have some quirks and/or slightly differing law, so it is always recommended that you consult with a local legal and/or real estate professional to see what works best for you and your specific situation.

Community property and other forms of ownership

For people who aren’t buying a house with a spouse or as an investment property, joint tenancy and tenancy in common are the most popular co-ownership options. However, there are a few less common co-ownership arrangements worth noting:

Corporation ownership

It’s possible to set up multiple owners of a property through a corporation or other legal entity. In this scenario, the corporation (or other legal entity) actually holds title to the property. It’s important to note that this type of ownership can potentially carry a hefty helping of liability and risk for the company that holds title – especially if there’s an accident on the property.

Partnership ownership

Partnership ownership allows you to own a house with multiple partners. This is more common for commercial property and real estate investments than with homeowners planning to live in the house. Under this model, you have the option of owning the property as a limited partnership, in which you designate a general partner, and other partners then take a more hands-off approach when it comes to managing the property.

How to plan for a home sale with multiple owners

Before you buy your home with multiple owners, it’s absolutely critical that you plan for selling a house with multiple owners. Waiting until you’re ready to sell to settle disputes can create disastrous disagreement, sabotage your eventual sale, and even lead to costly litigation. “In reality, a lot of the concerns that come up as you sell a property with multiple owners should be thought out when you purchase it,” stresses Herzberg. “That’s the best way to handle it.”

Here are a few questions to ask if you want to plan your multi-owner home sale before that initial purchase:

1. Who owns what portion of the proceeds from the sale?

As we mentioned earlier, not all types of co-ownership titles will divvy out the property based on an individual’s contributions. And if one owner ends up putting in extra time or money throughout the home-owning process than others, it may not be reflected in the final equity agreement. That’s why it’s critical to establish who owns what portion of the property, and how much everyone should be given when the home sale closes.

2. How will you divide home sale costs?

Selling any home takes hard work, and that process can come at a price. If you haven’t decided who will pay for what home sale preparations early on, you could see fellow homeowners back out of your sale in the middle of the process. Here are a few costs to make sure you’re accounting for before you sell your house with multiple owners:

• Staging costs
• Taxes, attorneys, and fees
• Repairs and maintenance
• Home upgrades
• Utilities and bills during the sale

3. Does your house involve trust ownership?

Creating a living trust is a good way to hand a real estate asset over to a child after a parent passes away – landing estate tax protection and avoiding probate in the process. During this process, you generally set up a trust and a trustee who manages the home for an eventual beneficiary. To sell a trust ownership, Herzberg says you’ll need to give the person who is conducting the closing a copy of the trust or a Certificate of Trust that states who has the power to sell. He also suggests having the authority for the trust available for the closing. As long as you’ve buttoned down those details, you should be set up for a smooth transaction.

As Herzberg explains further, “As long as the trust is clear on who has the authority, it’s not all that complicated.”

Hire a professional to ease your jointly owned sale

If you own a house with other people and decide to put that house on the market, it’s a good idea to engage a reliable real estate agent to represent you in the sale to make sure you maximize the home’s value and ensure a successful sale.

But if you go with an agent referral from a friend, family member, or colleague, the other owners involved in the sale might feel as though your voice and decisions over the house will be heard more clearly than theirs. That’s why it’s usually best to keep the terrain neutral by hiring an agent who no one knows personally but is an experienced, top seller. To make it easy, HomeLight can connect you with top-performing agents in your area with relevant experience for your neighborhood and property type. From there you can select someone who all owners believe are a good match.

Get your house professionally appraised

Setting an appraisal value will help keep everyone in the loop and can help clear the air in the instance of a buy-out. And to avoid as much conflict as possible, it’s best to choose an appraiser who is neutral. By pinning down a professional appraisal price that everyone can agree upon, you can determine a fair price for buy-outs. For instance, if the appraiser says the house is worth $500,000, and there are three parties with equal shares of the property, then each party has a $166,666 share in the property.

Pro tip: If you’re the one who sells your share of a multi-owner property, you’ll need to take steps to remove your legal obligation to the property. This includes making sure the mortgage is refinanced to remove you from the loan, or that your name is removed from the existing mortgage if allowed. You’ll also need to remove your name from the title with a quitclaim deed.

Understand the tax advantages and disadvantages of home co-ownership

The amount of tax you’ll end up paying when you’re selling a house with multiple owners hinges on the ownership structure you set up when you bought the property and can differ from state to state. As such, it’s always recommended to consult with your local tax and/or real estate professional to see what your best options are. Here are some typical tax implications for a few of the most common types of co-owned property:

Taxes for joint tenancy home sales

When you sell a house under a joint tenancy, you’ll still likely need to pay capital gains. However, since you own only part of the property, you’ll also be splitting up any taxes based on your percentage of ownership. So, if you’re splitting ownership between one other owner, you’ll end up cutting the total tax base of the final sale in two. Of course, if you’re a married couple that’s sharing a property under joint tenancy and filing a single tax return, you won’t have a tax advantage. But separate filers will only need to pay taxes on their share of the property.

Taxes for tenancy in common home sales

With tenancy in common, owners can hold different percentages of a house. And their tax write offs and final income taxes will depend on the size of their legal ownership. It’s also worth noting that you should be filing taxes based on the ownership percentage that you map out in your tenancy in common agreement.

Taxes for trust-owned property

Trust owned property can feature major tax advantages because it often allows you to be eligible for a step up in cost basis. That means that the cost basis of the house will be stepped up to the market’s value when the trust owner dies. The advantage? When you sell, you could end up only paying capital gains tax on the home’s appreciation after you inherit it. So, if the home underwent massive appreciation during the trust owner’s lifetime, you, as the heir, could bypass the typical taxes; and, instead, just end up paying capital gains on the amount of appreciation that occurs from the time you inherit the house and when you sell it.

Going to court when all else fails

Going to court should be your absolute last resort if you’re trying to settle a dispute with real estate co-owners. In addition to costing you extra time and money, real estate disagreements can end in a partition action. With a partition action, the court decides how the property should be divided. The whole process is notoriously expensive and may be stretched out over the span of years. All-the-while, the owners are still stuck with the costs of maintaining the property (and paying the lawyers).

To avoid court, go above and beyond to plan for the eventual sale before you buy a house with others. Prior to signing on the dotted line, be sure you know who owns what percentage of the property, who will pay for housing costs, what will happen if one party wants to leave or passes away, and how you’ll go about selling your house with multiple owners. And always capture those critical details in writing.

Plan now to sell your co-owned property with ease

Selling a house with multiple owners can be a breeze, as long as you plan out the sale well in advance. The more energy you put in before you buy a house with co-owners, the smoother your sale will go come closing day. As long as you agree to ownership up front, pin down the right co-ownership structure for you, plan for costs, and nail down agreements early on, you’ll be in the perfect position to sell your co-owned property with ease.

Also, lastly, it is always important to consult with your local real estate, tax and/or legal professional regarding your particular circumstances and the applicable law in your state to see what the best option is for you.

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Depending on your situation and current needs, either could be the right choice for you. Maybe you want to downsize and save for retirement. Or maybe you’re considering keeping the house as an investment property. Each option has its pros and cons.

To help decipher them, Mikki Ramey, a top real estate agent in South Carolina, and Richard Helali, a mortgage lending expert with HomeLight Loans, gave us some pointers.

“When it comes to this, it’s not that one choice is good or bad, but it’s really what that individual person is most interested in and most comfortable with,” Helali comments.

How do you decide whether to sell or keep a paid-off house?

There are plenty of reasons why you might want to sell your paid-off home. The number one reason, and the most obvious, is that you want to move.

Reasons to sell

• Desire to move to a newer, nicer home
• Need to relocate for work
• Move to be closer to family (or farther away)
• To have a smaller space after children move out
• Need more space for multigenerational living arrangement
• Want a less expensive property
• Want profits for retirement, vacation, or emergencies

Ramey says she recently helped a couple sell a house for $900,000 and bought a house for $500,000 in a 55+ community. They’re using the $400,000 in profits to support them in their retirement.

“Because another thing that people always forget about retirement, eventually, is your living expenses are pretty much relatively the same,” Helali explains. “In some cases, people end up spending more in retirement.”

Or perhaps the opposite is true, and you’re starting a family and need more rooms and spaces. Ramey recalls clients she worked with who owned a condo, but were starting a family and adopted two dogs, so they needed to buy a bigger house.

“The condo was paid off, so one benefit of that is you can go ahead and buy your next property and you don’t have to have a home sale contingency, which is very important in this market,” Ramey explains.

A home sale contingency is a clause added to a purchase agreement that makes the sale reliant on you selling your previous home before you can close on the next home. Most homeowners who are simultaneously buying and selling a home are stuck in a conundrum: They typically can’t afford to carry two mortgages at once, so they need to settle their previous home’s sale — and pay off the mortgage — before they can close on the new home and get funded for a new home loan.

In the case you sell a paid-off home, you won’t have to settle one mortgage before applying for a new one, so it gives you a leg up as a buyer.

Additionally, selling a home for profit can help sellers pay off debt they might have, whether it’s from another house, credit cards, medical bills, or student loans. Whatever the motivation may be, sellers usually have a good reason for selling their paid-off home, and have an idea what they’re going to do with the profit from the sale.

“The benefits of selling a paid-off home are usually that you have a plan B. Most people selling homes know what their next step is,” Ramey explains. “But when the mortgage is paid off, people are gonna use that money for something. Whether it’s to pay down extra debt, whether it’s to take vacations, whether it’s money that they’re saving for retirement.”

However, sometimes it’s best to keep the house after you’ve paid it off. For many people, it’s simply not the right time to move, or their current house is perfect for their current situation.

Reasons to keep

• No mortgage payments
• Cost of living significantly reduced
• Will only pay property taxes, utilities, and home improvements
• Able to keep home equity
• Can choose to sell when the time is right

“Really, the biggest advantage is you’re not going to have a payment and your cost of living goes down quite a bit,” Helali notes. “And especially in high-cost areas, if somebody can get to that point where they virtually pay off a mortgage, it’s going to make everyday life just easier, because you don’t have that mortgage to pay that you have to worry about, which is the nice thing.”

There are also several reasons to buy a new house but keep your paid-off house. If you can afford to purchase another house but keep up with the taxes and utilities of the paid-off house, you have even more options.

Helali notes that buyers who have already paid off their mortgages will have an easier time qualifying for loans to purchase a second home because they no longer have that monthly expense.

​​”Because they do not have a mortgage, and their primary residence is totally paid off, it makes qualifying for that new home significantly easier,” Helali says.

Reasons to keep, and buy another

• Keep it in case a family member needs it
• Keep for a second home
• Keep as a rental property to generate income

Ramey herself has investment properties and likes to keep the ones she’s paid off to continue generating rental income that she can put towards living expenses, or towards buying another investment property.

“I just keep properties because I like the fact that some day, I’m not going to work selling real estate. And I will live off the rental income from all of the properties that I own,” Ramey explains. “That’s a big benefit of never selling. Ultimately you’re going to have rental income generated from investment properties you purchased that will help pay for your living expenses.”

Major factors to consider

Now that we’ve identified some of the major reasons for selling or keeping a paid-off house, now let’s review the pros and cons that accompany them. Each home sale is different, however, and some pros and cons might not apply to your specific situation. Below are just a few advantages and disadvantages to consider.

Selling Advantages

• Lump sum of money: Because you don’t have to pay off your mortgage, all the money from the home sale goes straight to you (minus selling expenses and closing costs, of course). Having a lump sum of money could mean lots of financial freedom and opportunity.
• Tax advantages: If you’ve lived in the home at least two of the past five years, it’s likely you won’t have to pay capital gains tax on profits up to $250,000 for single-filers and $500,000 for joint-filers.
• Freedom to buy another house, invest, travel: You can use the profits from your home sale to buy another house, pay off debt, invest, save for retirement, or travel.
• Opens options to move: Selling your paid-off house for a profit gives you more leeway when it comes to purchasing a new house in your desired location and at your desired size.

Selling Disadvantages

• May not get the best price in a down market: Depending on the type of market you’re in, you might not get the best price if you sell now, meaning you may not achieve the profits you expect. While this might not be as important to you as other factors, it’s worth checking in with an expert to get insights on where the market is headed.
• No longer have the house as an asset, or if family members need it later: Owning a house outright is a huge financial asset which can help you in the future. Additionally, giving the house to family members or letting them live in it from time-to-time is very convenient.
• Lose out on potential rental income: Selling your home means you no longer have the option to rent it out, which can generate almost-passive income, especially on a home with no mortgage.

Renting Advantages

• Keep the house for future needs: Even if you rent the home for a while, you can later choose to let family members move in or sell it during a peak market for maximum profit.
• Provides income stream: Renting units can often be a low-maintenance way to earn money.
• With the rental property paid off, high profit cash flow: Receiving rent on a home that’s been paid-off already means you’ll pocket all of your rental income.
• Landlord tax breaks: Landlords can write off many of the expenses associated with their rental properties on their annual tax returns.
• Can sell later even with an existing tenant: If you decide the landlord life isn’t for you, you can usually sell the home with tenants living there, and their leases may transfer over to the new seller.

Renting Disadvantages

• Being a landlord can be challenging: Dealing with tenants and property management issues is not for everyone.
• Dealing with damage and legal issues caused by tenants: There’s a lot of potential legal liability that goes into being a landlord, so you’ll have to make sure your leases are airtight. If not, you might have to deal with damages and court dates.
• Keeping up maintenance and repairs: No home is perfect, and you’ll be the one your tenants call with any home issues, unless you delegate to a property management team. These problems can arise on odd hours, any time of the year.
• Second home costs: You’ll need to buy a second house to rent out your first — so even though you’ll be making rental income, you’ll still have another mortgage to pay.

What to expect if you do sell

Ramey says that the main difference between selling a paid-off home is the seller’s mindset, not necessarily the financial process itself. The main difference between selling a home with a mortgage and a home that’s been paid-off is not having to close one mortgage before opening another. Because your mortgage has already been paid-off, you don’t have to go through the extra steps of using the home sale to pay off your mortgage. This means you can avoid home sale contingencies when you buy your next home, which can drag the process on even longer. Plus, it’ll mean more money in your pocket from the sale.

Typically when a seller gets their closing statement, it will show how much money they are receiving from the sale, then subtracts the agent fees, seller’s costs, and the balance they owe on the mortgage.

“And after that, the bottom line is how much money you’re getting. If they own the place free and clear, they still have to subtract commissions and seller closing costs, but no balance, therefore, they get that money instead,” Helali comments.

The seller will still be responsible for all of the normal fees associated with a home sale, like agent’s commissions, property taxes, attorney fees, and taxes or fees on transferring the home’s deed. So don’t expect many savings on that front just because your mortgage has been paid off.

Real estate agents and experts like loan officers can help sellers throughout the entire selling and buying process. Additionally, they can help you decide whether selling your paid-off home is the best option for you right now.

“The longer I’ve been in real estate, the more I consider myself a real estate advisor to people, and sometimes it’s just not the right time to sell,” Ramey comments. “Like if they have their home paid off and it’s big enough for their family and they’re in the right place, it might not be the right time to sell.”

Conclusion

Ultimately, the choice to sell or keep a paid-off house is deeply personal. For some, keeping the house and enjoying a lower cost of living is the goal. Others might want to keep the house but buy another, and use the paid-off house as a source of rental income. Still, there are lots of advantages to selling your paid-off home, especially if you need a lump sum of money or need to move.

Be sure to talk with an experienced real estate agent if you are still having trouble making your decision. Get matched with a top-rated agent in your area with HomeLight’s Agent Match.

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Often, if you’ve lived in the house for at least two years and made a profit of less than $250,000 on the house, you won’t have to worry about taxes. But if it’s been less than two years, or you sold a second home, investment property, or made a larger profit, these gains can be subject to what’s called “capital gains tax.”

Ed Kaminsky, longtime real estate agent serving the Los Angeles area, offers insight on how home sellers can strategize for those inevitable tax implications. Here are a few questions and insights you ought to want to know the answer to before recording that home sale on your tax return.

What homeowners need to know about taxes and the sale of their home

What are capital gains?

Capital gains are profits made from selling an appreciable asset, such as a house, artwork, car, or stocks. The government taxes this income, though it works a bit differently from how regular income is taxed.

Both the federal and state governments tax capital gains at a lower rate than regular income. Additionally, the government has varying tax rules for different classifications of assets. For sales of primary residences, the first $250,000 of profits are generally not taxed at all if you file your taxes as single. Similarly, if you’re married and file taxes jointly, the first $500,000 of profits from your home sale are generally not taxed.

If falling within these parameters, the home seller can qualify for the capital gains exclusion, or what the IRS refers to as the Section 121 exclusion.

Kaminsky gives an example of a single filer who originally bought a house for $600,000 and later sold it for $1 million, which would result in a $400,000 profit. There, Kaminsky explains, a single filer would likely only have to pay taxes on $150,000 of the profit, but the first $250,000 would be tax free so long as they qualify for the Section 121 exclusion.

It is also important to note that there is a difference between short-term capital gains and long-term capital gains. Short-term capital gains are profits made from selling an asset that was owned for one year or less. These profits are taxed at the same rate as ordinary income, which is typically taxed at a higher rate than long-term capital gains. So if you sell a house that you’ve owned for less than a year, the profit will likely be taxed at the same rate as your regular income.

How much is capital gains tax?

Capital gains tax rates vary depending on your income. If you’re a single filer and make $40,400 annually or less, you will likely pay zero taxes on capital gains. The rate increases to 15% for single filers who earn between $40,401 and $445,850 per year, and 20% for single filers who earn over $445,850 per year, according to current IRS tax formulas.

Married filers who file jointly will likely pay zero taxes if their combined incomes are less than $80,800. The tax rate increases to 15% for those making between $80,801 and $501,600, and 20% for those making over $501,600.

Additionally, most states collect capital gains tax. The same rule for profits under $250,000 for single filers and $500,000 for joint filers on primary residences applies to state taxes, too. Some states, like Alaska, Florida, Nevada, Texas, and Washington, don’t collect any capital gains tax. Most of the remaining states charge at a rate between 3 and 7%; whereas California taxes capital gains at the highest rate in the country at 13.30%.

Do I have to report the home sale on my tax return?

You generally only need to record your home sale on your tax return if you turned a profit of $250,000 or more as a single filer or $500,000 or more as a joint filer. In that case, you will likely be eligible to exclude the first $250,000 or $500,000 of profit and record the remaining amount on your tax return.

However, if you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable, according to the IRS.

Yes, taxes are different if it’s an investment property or vacation home

The exclusions on profit under $250,000 (single) and $500,000 (married and filing jointly) only apply to primary residences. To qualify, you have to have lived in the home as your primary residence for at least two of the last five years.

So, profit made from selling a rental property or a vacation home can be taxed in its entirety.

Moving into your vacation home for two years and then selling may allow you to skirt the tax, but not rental properties.

“There was a time where sellers were just moving into all their rentals and living there for two years and selling them,” Kaminsky explains. “However, the IRS did change that regulation and now states that if you move into your rental property, you have to live there for five years before it’s considered your personal [primary] residence.”

However, even if you sell your rental property before you’ve lived there as your primary residence for the allotted five years, you may be able to prorate the capital gains taxes you owe based on the years you lived in the home versus renting it. Check with your trusted tax professional for the details if you think your sale may qualify.

Also, keep in mind that you can only exclude home sale profits from capital gains tax once every two years. So if you’re selling multiple homes at the same time, you’ll only be able to exclude profits on one.

When is tax on selling a house due?

You should generally pay capital gains taxes in the quarter you sold the asset being taxed. For example, if you sold your house in February, you’d want to pay the taxes before the Q1 deadline of April 15. The deadlines for the rest of the year are June 15, September 15, and January 15 for Q2, Q3, and Q4, respectively.

This is easier than waiting until the end of the year, since you still have all of the profit in hand. Alternatively, you may be able to increase your withholding tax for the rest of the year to cover the capital gains tax.

What are the most unpleasant tax surprises when selling a home?

Selling a home does come with many costs that are best to know about up front. For example, sellers will be responsible for paying the property taxes for the months they lived in the home.

Kaminsky strongly encourages sellers to keep the capital gains tax in mind when selling a house, especially if they’ve refinanced their mortgage in the past. Refinancing means that they’ve taken some of their investment out of their home, which could eat into their profit upon selling. So while the capital gain, which is calculated by subtracting the sales price of the home from the original purchase price, might be over $250,000 or $500,000, the seller might not actually have that profit in cash.

Which means they may have trouble paying their capital gains tax bill when the time comes.

Kaminsky explains, “That’s the biggest eye-opener for home sellers is when they’ve taken too much cash out of their property. That poses a real problem.”

Tips for average homeowners to avoid paying taxes on gains from a home sale

The easiest way to avoid the capital gains tax when selling a home is to only sell primary residences, and to not sell more than one in two years. But there are other ways you may be able to lower the amount of capital being taxed on your profit.

Kaminsky recommends keeping a record of all your home improvement projects. Money you put into improving the property might qualify as a tax write-off, and can possibly be deducted from your capital gain.

​​”Some people are really poor record keepers, but it’s important to keep all of your receipts for all the improvements you make, and review them with your CPA to see which ones are a tax write-off,” Kaminsky comments. “That’s probably the most common mistake is not keeping track of that.”

For these and other complex tax situations, Kaminsky recommends homeowners consult with a professional tax adviser.

The bottom line

To summarize, here’s a good way to gauge whether and how much capital gains tax you may owe from the sale of your home:

Did you own the house and live there for at least two out of the last five years?

• If yes, and you’re a single filer, you typically can exclude the first $250,000 of profits from the capital gains tax rate.
• If yes, and you’re a joint filer, you can typically exclude the first $500,000 of profits from the capital gains tax rate.
• If no (or if you used the property as a rental, and the home doesn’t yet qualify as a primary residence), it’s likely you can expect to pay capital gains taxes on 100% of the profits from your home.

To find how much profit you made off your home:

• Pinpoint the sales price, minus selling costs and fees.
• Take the original purchase price, plus buying costs and fees. Some qualifying home improvements can also be added to this total (consult your tax professional for details).
• Subtract this total from the sales price. This is an estimate of your capital gain.

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What is a short sale?

A short sale is an alternative to foreclosure in which the homeowner gets permission from the lender to sell the home for less than is owed. Homeowners typically request a short sale due to some form of financial hardship, and must be able to prove their inability to pay.

Short sales aren’t common in the current market, according to Helali, but can occur when competitive buyers have overbid due to low inventory and high demand.

The process

To prove financial hardship, you may have to provide pay stubs, W-2s, collection letters, utility bills, proof of other debts (such as student or car loans), proof of income (or lack thereof) and a hardship letter. Helali advises consulting your loan servicer, as requirements vary amongst lenders.

Once you gain the lender’s approval, you can list your home for sale. Typically, it’s best to list it at market value to recoup as much money as possible. It will be listed on the multiple listing service (MLS) as a short sale, which could deter some buyers due to the added steps and time it takes to transact a short sale, so it’s important to hire an experienced real estate agent — and possibly an attorney.

When you receive an offer, your agent will need to submit it to the lender for approval, which can be a lengthy process. Your agent will also ensure that all additional legal guidelines required in a short sale are followed.

The timeline

A short sale can take as little as a few months, but that’s rare. A conservative industry estimate might be six months, start-to-finish. Many take a year, sometimes more. Patience is a necessary virtue for any seller going through the short sale process.

What you’ll still owe

If you sell your house for less than you still owe on it, you may still remain responsible for making up the deficiency — the difference between the sales price and the outstanding mortgage balance.

Depending on where you live and the details of your short sale, the lender may be able to get a deficiency judgment and attempt to collect the debt, possibly by arranging a payment plan, by placing liens on any personal property you own, or by garnishing your wages. Some states limit the time a lender can attempt to collect on the deficiency judgment, and a few states restrict or disallow deficiency judgments completely.

Helali says the point of a short sale is that the homeowner can’t pay for the property, and the goal is for the seller to no longer be obligated to make up the difference between the home’s sale price and the balance on the mortgage. But a court-approved deficiency judgment following a short sale allows a lender to attempt to collect the additional funds.

If you’re struggling to pay the deficiency, your lender may consider accepting a settlement offer in which you pay back a portion of the amount you owe. Griffin says that as part of the negotiation, an agent should ask the lender to waive the deficiency judgment. “A lot do,” she says, especially if the hardship resulted from COVID-19.

When you can convince a lender to forgive the amount and accept the lesser sales price as payment in full for your mortgage, they’ll issue you a 1099-C Cancelation of Debt form. Forgiven debt is reported to the IRS by your lender (via the 1099-C) and is considered taxable income, so you’re still on the financial hook for paying any resulting taxes.

The differences between a short sale and a foreclosure

A short sale and a foreclosure are slightly different in how they affect your credit and future mortgage prospects, but both will remain on your credit report for at least seven years, Helali says. One key difference between them: A short sale is homeowner-generated, while a foreclosure is initiated by the bank. 

Lenders initiate a foreclosure when the homebuyer has fallen behind on loan payments — usually three to six months. The lender must take legal action to seize the property of a delinquent borrower and sell it at auction. Foreclosures are common when the homeowner has abandoned the home. If the occupants are still in the home, they can often be evicted by the lender. Once the lender has possession of the home, an appraisal will be scheduled so the property can be liquidated quickly.

With a foreclosure, the bank assumes ownership of your home, relieving you of many selling tasks. But a homeowner must use a real estate agent to do a short sale, Griffin says. “You can’t do it on your own.” One reason is that only an agent can list the property on the MLS, but you’ll also want an agent to help navigate the river of paperwork and negotiate with the lender on your behalf.

Another difference becomes apparent afterwards. According to Fannie Mae’s guidelines, you can apply for a new mortgage four years after a short sale, with a 10% down payment. If there were extenuating circumstances that led to your short sale, that can drop down to two years, but you must provide documentation regarding the special circumstances. Freddie Mac’s requirements are similar. FHA’s are even less stringent: you can apply for a FHA loan one year after a short sale.

According to Griffin, it takes five to seven years after a foreclosure before you can apply for a new mortgage.

To summarize:

Short sale

• Can take several months to a year to complete
• Can allow a borrower to purchase another property with a conventional mortgage in two to four years, on average
• Deficiency judgments can be negotiated
• Not required to mention on future home loan applications
• Stays on your credit report seven years or more

Foreclosure

• May be immediate but typically take a year or more
• Can allow a borrower to buy another property with a conventional mortgage in five to seven years, on average
• Deficiency judgments cannot be negotiated
• Required to mention on future home loan applications
• Stays on your credit report seven years or more

How long does a short sale stay on your credit report?

It’s pretty cut and dried with foreclosures: they stay on your credit report for seven years … or more. However, it gets a little more complicated with a short sale. As with foreclosures, short sales remain on your credit report for seven years, although it’s not as cut and dried.

For example, if you were late on your mortgage payments, a short sale will remain on your credit report for seven years from the delinquency date. But if you were never late, the seven-year clock starts on the date it was marked settled or paid.

Nevertheless, thinking a short sale will have less negative impact on your credit score than a foreclosure is a common credit score myth. Bottom line: there is no way to avoid hurting your credit score with a short sale.

A seller’s credit score can take a hit of 85 to 160 points after a short sale.

In general, the effect of a short sale on your credit score is comparable to the impact a foreclosure has on your score. However, the damage to your credit score can vary, depending on how the lender lists the sale. Many times, short sales are recorded as “settlements” instead of “debt paid.” This is a clue that the lender accepted less than it was owed. That has a negative impact on your credit score. 

If, on the other hand, the lender reports a short sale as “paid,” there will be less negative impact on your credit rating. It’s rare and usually only comes as a result of extensive negotiation. It helps if you never missed a payment, if your credit history is otherwise good, and if you provide a hardship letter outlining the extenuating circumstances. The FHA describes extenuating circumstances as “circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner.”

Any late payments on your mortgage that preceded the short sale will also have a negative effect on your credit, separate from the damage caused by the short sale alone. Keep in mind, a deficiency judgment will appear on your credit report in addition to the short sale, potentially adding to the credit damage.

How the short sale could appear on report

Reading a credit report gets confusing because a short sale probably won’t even be listed as a short sale. It’s more likely to be listed as:

• a derogatory mark
• a charge-off
• a settlement
• “settled for less than the full amount due”
• “not paid as agreed”

The term “short sale” won’t appear on your credit report.

Can you get a short sale removed from your report?

It’s not impossible to have a short sale expunged from your credit report, although Helali says it’s unlikely. Technically, there’s no law forcing creditors to report delinquencies on your credit history (other than missing child support payments).

If a creditor does report it, the creditor can remove it at your behest. The best approach is to write a letter to the creditor, asking them to remove the comment.

Another tactic is to report an error on your credit report if a short sale was mistakenly listed as a foreclosure. Because there is no code designating a short sale, some credit bureaus substitute the foreclosure code. If your credit report reveals such an error, you can contact a Fair Credit Reporting Act attorney to help you get it removed.

Be aware that even if you do manage to get the short sale removed from your credit report, Helali says it may still show up when new lenders conduct a background check.

How can I fix my credit after a short sale?

If you can’t get the short sale removed from your credit report, you’ll have to start rebuilding good credit the hard way. Be aware that it can take three to seven years, depending on how good your credit score was before.

Remember that your credit may rebound faster with a short sale than a foreclosure, Griffin notes.

Start by getting a copy of your free credit report from all three credit bureaus: Experian, TransUnion, and Equifax. Check for errors. More than 80% of credit reports have mistakes that hurt your score.

Your checklist should include the following actions:

• Look for debts owed by people with similar names and medical collections.
• Check the report for suggestions about how to get a higher score.
• Don’t close any credit accounts. The length of your credit history is helpful.

Other tips to help rebuild your credit rating include:

• Pay down debt as much as possible, especially on revolving accounts like credit cards. The debt-to-credit ratio is important to your credit rating. About 30% of your credit score reflects your credit card balance. Regardless of your income, lowering your credit utilization ratio will improve your score.
• Make all payments on time.
• Consider opening new accounts to establish good credit. (However, Helali says, it can be difficult to open new accounts in the immediate aftermath of a foreclosure.)
• Consider opening a secured line of credit to help improve your credit score. Secured cards and credit-builder loans are good options.
• Ask the lender for a 1099-C instead of a deficiency judgment. This is a cancellation of debt, and will make it easier to begin repairing your credit rating if you don’t have to cover the deficiency.
• Consult an attorney specializing in bankruptcy.

The best way to repair your credit, Helali says, is to “make your payments on time and keep your balances low.”

Griffin concurs, adding that establishing good payment history is vital in fixing your credit rating. But she has noticed over the years that if a person has been delinquent on their mortgage, they’re likely to be delinquent on other bills as well, so reestablishing good payment history is an uphill climb.

Short-sale alternatives

Alternative tactics may work better than a short sale. A CoreLogic report indicates that U.S. homeowners gained 10.8% in equity from 2019 to 2020. Your home may be worth more than you think, allowing your equity to help cover your debt.

“Talk to your lender,” Helali urges. “Banks want to help. They don’t want to own your home.” He lists some of the fees banks become responsible for if they foreclose on a property, such as attorney’s fees, county fees, and other expenses. He says banks would rather help homeowners stay in their homes than take properties and go through the hassle of selling them.

Before choosing a strategy, explore available resources and weigh every option to determine what’s in your best interest.

1. Start by contacting your lender to find out what options they offer. Fannie Mae and Freddie Mac offer programs to help borrowers avoid a short sale or foreclosure. “Start early,” Griffin advises, “before you’re delinquent.”
2. Have your real estate agent ask the lender about a “cash for keys” relocation package. Because the servicing company pays the agent’s commission, there are no expenses. Even better, Griffin points out, the homeowner gets a few thousand dollars for moving expenses.
3. Consult the U.S. Department of Housing and Urban Development’s resources to help homeowners avoid foreclosure.
4. Investigate the possibility of refinancing to get a better rate.
5. Put your mortgage into forbearance. Forbearance plans are included in the assistance offered by the government to homeowners struggling due to the coronavirus pandemic. Forbearance allows you to temporarily pause or reduce mortgage payments. Under the CARES Act, lenders cannot require borrowers to pay the money back in a lump sum. “Forbearance is the most common option,” Helali comments.
6. Look into additional mortgage relief options provided by the government through the CARES Act.
7. Seek a loan modification to lower the payment amount, lengthen the term of the mortgage, or lower the interest rate. To qualify, you’ll need to apply with your lender and show proof of hardship.
8. Ask your lender for a payment plan.
9. Sell your home to a third party. This can still be done after you receive a demand letter from the lender, even if an auction or foreclosure has been scheduled. HomeLight’s Simple Sale can take off some of the pressure with its benefits of no showings, no agent fees, and all-cash offers. If you sell with an agent, make sure the sale price will cover selling fees, which can cost 9%-10% of the sale price, as well as any attorney’s fees and late fees you may owe. Otherwise, you may have to pay those charges out of pocket.

Find an experienced real estate agent familiar with short sales, as well as dealing with lenders and attorneys, to help you manage your situation.

Conclusion

A short sale is not an easy way out of a mortgage you can no longer manage. You must go through a rigorous process and produce prodigious amounts of paperwork to qualify. And if you do qualify, it will put a blot on your credit record for several years.

“Don’t be afraid or embarrassed to go through the process,” Griffin says. Fear sometimes delays homeowners from getting started on the road to a short sale. And while the road may be long and can be bumpy, it might be the best path to the solution you need and a chance to start over.

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Maybe you got caught up in a bidding war, bought at a market peak, and buyer interest (along with home values) has since cooled. Or you’ve experienced a sudden and extreme change to your financial situation, such as a layoff or death in the family. Whatever the circumstance, you should act early if you’re suddenly struggling to make your monthly mortgage payment. Selling at a loss is one option — but there are other avenues you can explore before taking that step.

For insight about selling a home during a turbulent financial time, we spoke with real estate pro Kim Batterman, a single family home expert based in the Fox Cities area of Wisconsin. Batterman works with 74% more single family homes than the average agent in the area.

We also connected with HomeLight Home Loans Mortgage Sales Leader Richie Helali, who offered an insider’s look at mortgage options that could help you hold on to your home — or let it go without falling into foreclosure.

Should you sell your house at a loss?

When to consider selling at a loss

If thoughts of your mortgage payment (combined with upkeep costs) keep you up at night, it may be time to sell. These are some reasons that selling at a loss could make sense — and free you from a financial bind that’s been weighing on you.

You fall behind on your mortgage payments and can’t seem to catch up

Perhaps you underestimated how much it costs to own and maintain a home. Or your company eliminated your long-time position and you’re going back to school. Maybe you’re facing catastrophic medical bills. You run the risk of a foreclosure if you miss too many payments. Selling, even at a loss, could be the better alternative.

You owe significantly more than your home is worth — and you’re struggling financially

Maybe the real estate market took a dive and you went overboard on past home renovations. You’re maxed out on second loans and now you owe more than your home’s value. Whatever the reason, you’re struggling to keep up with house payments, and you don’t see things changing anytime soon.

You have to relocate for work

When it comes to your career, your employer has the power to mandate where you live. This holds particularly true for members of the military, when a sudden order moves you to the other side of the country, or another part of the world.

You don’t want to become a landlord

Renting out your home could alleviate some financial burden. But becoming a landlord isn’t for everyone. As the owner, you’re still responsible for the cost for maintenance, managing tenants to ensure timely payments, and the legal liability of renting to others.

You’re going through a divorce

Splitting assets to comply with a divorce decree may result in the immediate sale of the shared home, even if real estate market conditions aren’t the best.

There’s been a death in the family

After enduring a heart-wrenching loss, your financial situation may change dramatically to the point where selling becomes your only option.

When to think twice

If you have the financial resources to stay afloat, it could be better to wait until the market swings to your favor rather than lose some or all of your equity by selling at a loss. Here’s when you may want to reconsider — or at least carefully weigh the consequences of — a home sale.

Your home value dropped, but you can still manage the mortgage payments

You may feel lousy after buying at a market peak, right before home values plummet. But if you can still manage the payments and upkeep, it may be beneficial in the long run to hold on to your home if your original plan was to live in the house for the long term. Since overall home values have increased since 1940, you could recover some or all of your home value when the market recovers.

Homeownership isn’t what you expected

Perhaps you rushed into buying, and homeownership feels more like a burden than an achievement. Now you want to free yourself from a large monthly mortgage payment and the cost of maintaining a home. After all, moving abroad and working remotely sounds more appealing than cleaning gutters and raking leaves.

Before you jump into a nomadic lifestyle and take a loss on your home, evaluate how much you stand to lose, along with the long-term financial ramifications, if you sell at a market low. How long will it take you to recover from the loss? Would it be better to hold off for now and wait until the market cycles back in your favor? If you can stand to wait, you could pursue a lifestyle change without the financial setback of losing money on your home.

You want to buy a different house

You just stumbled upon your once-in-a-lifetime dream house and need to sell your current home quickly, even if it means losing some of your equity. If you’re getting a great deal on the new house and think the home will appreciate in the long run, selling could be a smart risk. But if you lose money on your current home while piling on additional financial stress with a higher house payment, you may want to reevaluate selling.

Alternative solutions to selling at a loss

If you’re in a temporary financial bind and struggling to pay the mortgage, hanging a for sale sign on your lawn isn’t the only option. Consider these alternative options if you’re determined to keep your home instead of selling it for less than you purchased it.

And if you’re feeling the pinch financially, look into those options sooner than later. “Start that process immediately,” encourages Helali. “If … they’re in a situation where [making the mortgage payment] is going to be a problem, even if they haven’t missed any payments yet … reach out to the loan servicer and see what options may be available.”

Hold on until home values recover

Before you rush to sell when market values are low, think about whether you can hold on — at least until prices start trending upward. Look into temporary income-boosting solutions such as renting out a spare bedroom on Airbnb, applying for a second job, or launching a side hustle.

Refinance your existing mortgage loan

Determine whether a refinance loan could lower your monthly payment to allow for extra breathing room in your monthly budget. If you qualify and your home appraises at the necessary value, a lower interest rate or longer loan term (30 years instead of 20, for example) could drop your monthly payment to an affordable amount.

A refinance loan comes at a cost, though. Closing costs generally run 1% to 1.5% of the loan amount, although no closing cost options exist (that is, they’ll be lumped in with your principal or you’ll pay a higher rate).

If you’re feeling the heat financially, Helali stresses that you shouldn’t wait if you think refinancing is the best option. “More options may be available to you if you haven’t been late on your mortgage,” he says. Lenders generally won’t approve a refinance loan if you’re already behind on your mortgage payments.

Negotiate a loan modification

Refinancing isn’t an option for everyone, especially if your home’s value has dropped and you no longer have enough equity or income to qualify. Another option you can explore includes a loan modification, or a negotiated agreement with the lender to change your loan terms.

A modification could reduce your monthly payment by granting additional years to pay off the balance, lowering your interest rate, or reducing your loan balance. Not all lenders may offer a loan modification option, so contact your mortgage provider directly if you’re considering this solution.

Ask for a loan forbearance

If you’re in a temporary financial slump and just need a few months to recover, you may be able to work out a forbearance agreement with your lender. Your lender agrees to let you skip or reduce your monthly payment for a set period of time. This option gained national attention among homeowners during the 2020 pandemic, when the federal government implemented the CARES Act for economic relief.

Forbearance doesn’t forgive your debt, though. You’re still on the hook for the mortgage, and your lender simply grants a temporary reprieve for payments.

Short sale: selling when you owe more than your home is worth

You may reach a point when alternative solutions to keep your home don’t resolve your financial concerns. In certain cases, selling your home remains the most logical choice. But there’s one caveat to selling: if your mortgage balance exceeds your home’s value, you could end up paying the difference out of pocket when you sell. That is, unless your lender agrees to a short sale with a deficiency waiver.

In a short sale situation, the mortgage lender allows you to sell your home for less than the remaining loan balance. Laws in some states hold the homeowner responsible for the difference between the loan balance and purchase price, unless the lender waives the right to collect by issuing a deficiency waiver. Most states allow lenders to pursue a judgment against the borrower after a short sale. Laws in a few states, such as California and Nevada, prohibit deficiency judgments in some circumstances.

One benefit of a short sale: it doesn’t impact your credit as much as a foreclosure or bankruptcy, say Helali and Batterman. Instead of waiting seven years before you’re able to qualify for a conventional loan with a foreclosure on your credit record, you may qualify for a new mortgage two-to-four years after a short sale, Helali explains.

Short sales have their drawbacks, though. You’ll need to prove, through documentation, substantial hardship to the lender. “The banks are gonna send you documentation that asks what assets you have and you’ve got to explain, identify, and then prove what assets you have or don’t have.” It’s a complicated and time consuming process, warns Batterman.

Deed in lieu of foreclosure: your final option before foreclosure

A deed in lieu of foreclosure retains similarities to a short sale. But instead of selling your home to a third party buyer, you transfer ownership to your lender to avoid a forced foreclosure. Similar to a short sale, you may need to request a deficiency waiver in writing from your lender to cancel any outstanding debt liability.

Tax implications: Is your loss deductible?

After taking a loss on the sale of your home, can you at least deduct the amount on your income tax return? Unfortunately, in most cases, probably not.

According to IRS rules, you can’t claim a capital loss against personal property, including a primary residence, on your tax return. (Loss to business property is a different story.)

And converting your home to an investment property probably won’t benefit you. That’s often because the IRS values the home based on the date you convert your home for business or investment use, not the date of the original purchase. For illustration, take a look at the following scenarios.

Scenario 1: Morgan buys a home for $350,000. Due to financial hardship, she sells her home during a real estate market dip two years later for $320,000. Because her home was also her primary residence, Morgan doesn’t qualify for a capital loss tax deduction.

Scenario 2: Alex purchases a home as a primary residence for $400,000. She converts it to a rental property two years later during a real estate downturn, when the fair market value of the home dips to $325,000. After one year as a landlord, Alex sells the home for $322,000.

In this situation, Alex would likely be able to deduct a capital loss on the rental property, but it would come with some caveats. First, Alex would need to calculate the loss based on the home’s fair market value when she turned the home into an investment property, or $325,000. Per IRS tax code, she can generally deduct up to $3,000 of capital loss per tax year (and carry over additional losses to future tax years). In this situation, Alex can deduct a $3,000 capital loss from her income tax return, not the $78,000 loss from the home’s original purchase price when the home was her primary residence.

It’s always best to consult a tax professional to see what options (and deductions) may be available to you in your given circumstances.

The IRS may tax forgiven debt as income — with some exceptions

In general, the IRS considers a debt amount that the lender forgives as taxable income. That’s because the borrower essentially gains back the amount they would otherwise have been obligated to pay. Loan forgiveness may include a short sale, foreclosure, deed in lieu of foreclosure, and loan modification.

Exclusions apply in certain circumstances if the lender cancels a debt on your primary residence. The IRS Interactive Tax Assistant can help you determine whether you’re required to include the canceled debt on your federal income tax return.

Of course, the tax scenarios and examples in this blog post are meant to be illustrative and educational, and should not be considered legal or tax advice. If you need help determining the taxes on your home sale, it’s important to consult a skilled tax professional.

Tools and resources to help you sell and move on

We assembled a list of online tools and resources to help you navigate your available options, from whether you should sell or follow an alternate route.

Online home value estimate

HomeLight’s Home Value Estimator offers a quick, easy jumping off point for determining your home’s value estimate based on current market trends.

Your trusted mortgage advisor

If you’re just starting to struggle and you haven’t yet missed a payment, look into available refinance options to find out if there’s a way to lower your monthly payment.

Your lender or loan servicer

Contact your mortgage lender or servicer to ask about what options are available to you if you can no longer make your mortgage payment or if you’ve already missed a few payments. Each lender manages their own processes, requirements, and timelines for loss mitigation avenues such as forbearance and loan modification, says Helali.

And don’t be afraid to ask about specific options. “It’s kind of [the mortgage servicers’] job to provide these options to folks when they say that they’re having a little trouble,” says Helali. But “it’s always good to ask specifically for these [options] by name,” he adds.

Distressed sales real estate agent

A seasoned agent with experience can provide you with an individualized market analysis and advise you on options for selling. If your loan amount exceeds your home’s value, it’s important to work with an agent who has short sale experience because of the complicated documentation requirements, says Betterman. “Each [bank’s short sale] portal is different. Every bank has a different portal, so you have to have some IT expertise,” she adds. “You also have to have some additional legal information, and many times people will hire an attorney to help them.”

Instant cash offer

If you’re looking to sell as quickly as possible, you can also request an instant offer from a cash buyer. With a cash buyer program such as HomeLight’s Simple Sale, you could sell your home in as little as 10 days without agent fees or listing costs.

Just remember: selling at a loss isn’t your only option

While no one wants to find themselves in a financial bind, preventing foreclosure and selling at a loss could end up being the best choice for your situation. But before you choose to sell, explore all of the options that could help you keep your home, from refinancing your existing loan to negotiating a loan modification.

In the end, losing money on a home sale isn’t the ideal outcome. But it could free you from a stressful situation, allowing you to move on to a new phase of your financial journey.

Start By Requesting an 'As Is' Cash Offer

We’ll compare your offer side-by-side with an estimation of what you could fetch on the open market so you can make an informed decision.

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If you discover extra funds in your budget, you could experience the sensation of a mortgage-free life sooner than you planned.

Whether you recently landed a pay bump or inherited a tidy sum, putting additional cash toward your principal mortgage balance can help you pay off your mortgage early. But is paying off your mortgage loan the best financial strategy? Some financial experts argue that mortgage debt could be considered “good debt.”

Should I pay off my mortgage?

In certain situations, it could be better to hold on to your mortgage and make regular payments as scheduled. In other instances, paying down your loan and eliminating your mortgage early could give you a boost to explore other financial options.

Figuring out the best way to channel your extra cash boils down to your personal situation. The decision hinges on both your financial profile and your philosophy about whether the extra money could be put to better use elsewhere.

To walk us through the ins and outs of mortgage payments, we spoke with two industry leaders who know a thing or two about mortgages:

• Chloé Moore, an Atlanta-based certified financial planner (CFP®) ranked as one of the 100 top financial advisors in 2021 by Investopedia
• Arkansas real estate agent Tara Limbird, whose team landed on the Wall Street Journal’s list of top real estate firms in the U.S

Here’s what you need to know before diverting extra funds to your home loan and paying it off early.

The basics: how paying off your mortgage early works

Every time you make your monthly mortgage payment, your loan servicer applies a portion of the payment toward paying down your loan balance, while the remainder pays for interest.

Although you pay a fixed amount each month, the split changes with every payment. At the beginning of your loan term, a larger portion of your payment pays for interest. But as you pay down the loan balance, your interest fees decrease. Over time, the split reverses — and a larger chunk of the monthly payment applies to your loan balance than to interest fees.

Let’s say you take out a $240,000 mortgage loan to purchase a $300,000 home. You lock in a 3% fixed interest rate over 30 years, and your monthly payment totals $1,012. When you make your first payment, $412 of your payment applies to the loan balance while $600 pays for interest. And after making faithful payments for 15 years, the loan balance drops to just over $146,000. With a lower loan balance, you pay less in interest fees, or $368. The larger remainder, $644, pays down your principal.

See the table below for an example of how the interest fee and loan balances change over time with regular payments.

Example of how mortgage payments amortize over time

After 30 years of monthly payments, you’d pay a cumulative total of $124,666 in interest and the loan balance in full.

Adding to your regular payment pays off your mortgage sooner

What happens if you pay an extra $100 every month toward the same loan’s principal balance? Two things: you pay less in overall interest, and you pay off your loan faster. That’s because the extra payments accelerate paying down the mortgage balance, which in turn reduces interest fees.

According to Freddie Mac’s Extra Mortgage Payments Calculator, you’d save $18,828 in total interest by the time you pay off the loan in our example. You’d also pay off the balance four years earlier than if you didn’t add an extra $100 to your monthly payment.

Perks of paying off your mortgage early

According to the U.S. Census, nearly 38% of homeowners don’t have a mortgage on their primary home. Here’s why it pays off to accelerate your home loan payments and join this enviable group:

Pay less interest over the life of the loan

By paying off your mortgage loan early, you’ll save on interest expenses over the life of the loan. Depending on your loan terms and the amount you prepay, your savings could add up to thousands of dollars, keeping more money in your pocket over the long term.

Free up cash for other purchases or investments

According to the U.S. Census Bureau’s 2019 American Community Survey, the median monthly housing cost for homeowners with a mortgage was $1,609. For homeowners without a mortgage? $505. That’s an extra $1,104 each month that could be diverted to investments for early retirement, or to fund a once-in-a-lifetime trip to Tahiti.

When you’re mortgage free, cash that was once budgeted for mortgage payments could be put toward other financial goals, says Moore.

Gain peace of mind

If you’re risk averse, paying off your mortgage early may take a weight off your mind, knowing that you own your home outright. “For some, the piece of mind that comes with being debt free far outweighs any financial benefits,” says Moore.

Limbird agrees, adding that while there may be reasons why it’s better not to pay off your mortgage early, “for some people … it’s almost a sense of accomplishment to have your home paid for.”

Transform your financial outlook and mindset

A staunch advocate for paying off all debt regardless of the type, financial guru Dave Ramsey recommends venturing into investment properties to accelerate wealth after paying off your home loan, not before. When you pay off your mortgage, “it changes the way you operate the rest of your money, because you’re standing on such a more solid foundation to live your life,” says Ramsey.

Drawbacks of paying off your mortgage early

A mortgage-free life may offer a sense of accomplishment and freedom, but diverting excess cash to your home loan could limit you in other ways. These are some reasons why allocating your extra budget elsewhere may prove better use of your money.

You could lose out on a tax benefit for having a mortgage

If you itemize deductions on your federal tax return, you won’t be able to itemize the mortgage interest tax deduction after your home loan is paid off, since you’ll stop making interest payments. However, you’d still be able to deduct property tax expenses if you qualify.

For most homeowners, the lost deduction won’t affect their taxes. According to the IRS, only 11.4% of individual tax returns filed in 2019 included itemized deductions. The majority of individual tax filers opted for the standard deduction, which doesn’t allow for an itemized interest deduction.

It may be wiser to channel extra income to higher interest debt

If you carry credit card or personal loan debt along with a mortgage loan, it probably makes sense to divert extra funds toward that higher interest debt before paying off your mortgage. The U.S. News reports that the average annual percentage rate (APR) for credit cards in their database ranges from 15.56% to 22.87%.

When compared to sub-3% mortgage interest rates as of October 2021, it’s likely that you’ll save more on interest fees per dollar borrowed if you prioritize high-interest consumer debt first before your mortgage.

You might benefit more by investing the extra income

Limbird points out that with historically low mortgage interest rates, it’s “very cheap to borrow” money for a home. “It might be advantageous for someone to be putting that [extra] money into a retirement plan” instead, she points out. Limbird also encourages homeowners to speak with their financial advisor about potential investments. “If your interest rate is 2.5% or 3% … If you could earn more than that, then you’re gonna come out ahead.”

Moore agrees that there’s potential to earn more overall by investing extra cash instead of paying off a mortgage. In some cases, homeowners “can position themselves to pay off the mortgage balance from their investments down the road,” she suggests.

It tough to withdraw equity from your home if you need it fast

By making extra loan payments, you increase the amount of equity you have in your home. Home equity, considered an illiquid asset that can’t easily be withdrawn, isn’t easy to tap into if you’re in need of funds fast.

If you’re saddled with an unexpected expense or have an emergency, it takes time to access funds tied up in your home. You’ll either need to sell your home or refinance to access cash from your home equity. If you don’t have an emergency fund that’s easy to access, you may want to reconsider paying down your mortgage balance first.

You may need the extra funds for more pressing priorities

Other financial goals could take precedence over paying off your mortgage. You may want to establish a college account or retirement fund before you channel extra funds to your mortgage. Or perhaps you’re ready to retire an old vehicle. It may make sense to attend to other financial obligations before your home loan balance.

Your loan servicer might charge a prepayment penalty

Some lenders charge a penalty fee if you pay off your loan early, or if you pay a specific amount above what you owe for the month. Prepayment penalties don’t apply to all loans, and lenders must disclose whether a penalty applies to your loan before you sign the loan documents. Under the Truth in Lending Act (TILA), prepayment penalty terms must appear on an applicant’s loan disclosures.

Penalty amounts vary depending on the specific loan terms. Some lenders charge a percentage of the loan amount or interest fees for a set number of months. Other lenders charge a flat penalty fee or apply a sliding fee schedule, where a prepayment early in the loan term triggers one fee, while a prepayment five years later triggers a different penalty amount.

If you decide to pay off your mortgage early, commit to a strategic plan

You’re committed to paying off your mortgage early, but how should you do it? That all depends on your financial standing and comfort level. “I don’t feel that one method of paying off your mortgage early trumps the rest,” says Moore. “The best decision for you is based on your current mortgage terms, financial situation, risk tolerance, and personal goals.”

To determine a strategy for paying off your mortgage, select a method that suits your financial profile. If you receive a pay raise, for example, you may want to commit that extra $200 every month to your loan payment. But if you receive a one-time inheritance, you might consider a single, lump sum payment to reduce your principal loan balance.

Pro tip: If you pay down your balance by submitting loan payments higher than your monthly minimum, Limbird says to make sure the loan servicing company applies the excess payment toward your balance, not as a prepayment for future months. Call your lender before you make the payment and confirm the company applies the correct amount to your balance when you receive your loan statement.

Methods for paying off your loan early

Compare the following payoff strategies by calculating how each method impacts your interest savings and payoff timeline. Use an online calculator such as Freddie Mac’s Extra Mortgage Payments Calculator to run the numbers. Then select the solution that works best for you.

Bi-weekly payments, or one extra monthly payment each year

When you set up a bi-weekly payment schedule with your loan servicer, you pay half of your monthly payment amount every other week. At the end of the year, you end up making 26 total payments, which adds up to 13 monthly payments instead of the usual 12.

Some mortgage servicers charge a fee for this service, but the Consumer Financial Protection Bureau (CFPB) says you can also make monthly payments as usual and add a 13th payment on your own. You’ll achieve the same result.

Add to your monthly payment

You can also choose a specific dollar amount that you’re comfortable budgeting and commit to adding that figure to your monthly mortgage payment. So if you owe $1,000 per month, you may feel comfortable allocating an extra $100 for a total of $1,100 each month.

Since you aren’t obligated to make the extra $100 each month, you can always skip the add-on amount if you find yourself in a temporary financial pickle. On the flip side, you could also choose to increase the add-on amount if you find extra room in your budget.

Refinance to a shorter loan term

Another strategy is to pay off your mortgage early by refinancing to a shorter loan term. With the refinance strategy, you apply for a new loan that pays off your existing mortgage. If your current loan term has 24 years remaining, for example, you could pay off your mortgage sooner by applying for a 10-year mortgage.

To determine whether refinancing fits your financial goals, calculate your interest savings and weigh the risk of taking on a higher monthly payment. And don’t forget — you typically incur closing costs when you refinance.

Moore points out that refinancing to a shorter loan term often requires a higher monthly payment amount — which you’re locked into for the duration of the loan. You’ll want to compare interest fee savings before you commit, she advises. “If your [current] interest rate is competitive and there are no prepayment penalties, it’s worthwhile to compare how much interest you’ll save with a refinance versus making additional payments,” says Moore.

Limbird also warns homeowners to consider carefully before choosing a shorter term and higher payment, particularly if your income fluctuates. If you rely on commissions or self-employment income, there’s a chance you could struggle with a higher payment during an economic downturn.

Lump sum payment

If you’d rather pay down your mortgage balance with a large chunk of extra cash, you could opt for a one-time additional payment. Your monthly payment remains the same, but a lower loan balance also reduces interest fees, which accelerates the balance payoff over time.

Weigh your options before paying off your mortgage early

Where you allocate extra funds can be a balancing act that requires strategic and individualized financial planning. Paying off a mortgage early can work well for one person’s finances but have a negative impact on another. If you’re in doubt, consult with a reputable financial advisor for advice that fits your specific situation. Ultimately, whether it’s a good idea to pay off your mortgage early or not depends on you.

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There’s a common misconception that there are states with no property taxes. While this isn’t exactly true, there are states where homeowners pay very little.

To give you insight on how some states have next-to-no property taxes, we spoke with an experienced certified public accountant (CPA) and created this detailed list of states with the lowest property taxes.

States don’t levy real estate property taxes, local governments do

While property taxes may be outlined under State Law, county and municipal governments are the ones that levy them.

Zach Reece, CPA and the owner and COO of roof repair company Colony Roofers in Atlanta, GA, explains that “property taxes are levied from all property owners within a given area based on the value of their property and the needs of the local government that receives the tax revenue.”

This means that real estate property taxes aren’t included in the payments you make on your state or federal tax returns. In most cases, homeowners pay their local property taxes as part of their monthly mortgage payments or directly to their local tax office.

Effective tax rates offer a state-level average

Because property taxes are charged by local governments, the rate homeowners pay differs depending on where they live within a state.

However, we can calculate the average property tax for a given state by looking at effective tax rates on owner-occupied housing. Effective tax rates are the average amount that homeowners across a state pay in property taxes, expressed as a percentage of the value of a home. To find out your individual tax rate, divide your annual property tax bill by the estimated value of your property.

States with the lowest property taxes

Let’s take a look at the ten states with the lowest effective property tax rates. Each rate is calculated by using current U.S. Census data and dividing the median home value by the median property tax paid.

1. Hawaii

Median property tax rate: 0.28%

While the cost of living in Hawaii is high, property taxes are very low. The cheapest of its five counties, Honolulu, has an average rate of 0.38% while the most expensive, Hawaii County, has an average rate of just 0.9%.

These low tax rates still leave Hawaii counties with plenty of money, as the state’s median home price is $691,360 — 82% higher than the national average. Additionally, out-of-state property owners pay more, with an average rate of 0.83%.

2. Alabama

Median property tax rate: 0.40%

Living in Alabama is relatively inexpensive and the median home price is also below the national average. This makes Alabama a great place to live for people looking to save money or retire on a fixed income.

3. Colorado

Median property tax rate: 0.49%

Colorado has a cost of living that’s just over the national average, and home prices that exceed the national average by about 27%.

One reason that Colorado’s property taxes are so low is because the state passed the Gallagher Amendment in 1982, limiting the amount of a home’s value that is subject to property tax to 45%.

4. Louisiana

Median property tax rate: 0.53%

Louisiana’s cost of living is around 7% lower and home prices are around 52% lower than the national average. A big factor influencing the state’s low property tax rate is its generous homestead exemption, which gives homeowners a break on the first $75,000 of their home’s value.

5. Nevada

Median property tax rate: 0.53%

Home prices in Nevada are just under the national average while the cost of living is slightly above average. The state’s low property taxes are partly due to an abatement, capping owner-occupied residential property taxes at 3%.

6. District of Columbia

Median property tax rate: 0.56%

Like Louisiana, Washington, D.C. also has a homestead exemption. D.C.’s exemption functions similarly, but exempts $75,700 instead of $75,000. Additionally, homeowners who are over the age of 65 who earn under $134,500 can apply to have their property taxes reduced by half.

7. South Carolina

Median property tax rate: 0.55%

South Carolina gives its residents lower property tax rates by making a distinction between owner-occupied residences and other properties. For properties occupied by the owner, the assessment rate is 4%, while rental, second, and investment properties are assessed at 6%.

8. Delaware

Median property tax rate: 0.56%

While home values and cost of living are just about average, Delaware is often seen as a tax haven for retirees, especially from the neighboring state of New Jersey. This is largely because Delaware maintains their low property tax rate by enacting relatively high income taxes, making out at 6.6%

9. West Virginia

Median property tax rate: 0.57%

West Virginia has an average home value of $119,600, less than half of the national average. Furthermore, the cost of living is about 10% less than most states. Combined with low property taxes and exemptions for seniors and disabled individuals, West Virginia is definitely an affordable place to own a home.

10. Wyoming

Median property tax rate: 0.57%

Rounding out the bottom of our list is Wyoming. Wyoming has fairly average home prices and a slightly lower cost of living than most states, but property taxes are very low. Rates are generally this low because the state only applies property taxes to 9.5% of the total value of residential properties.

Homeowner tax breaks help lower the bill

Even if you don’t live in one of these states, you still might be able to save on your annual tax bill by making use of exemptions, deductions, and other homeowner tax breaks. Here’s some common ways for homeowners to save come tax time:

• Home mortgage interest deduction: Reece tells us that this is the most common way for homeowners to catch a break on their federal taxes. The IRS allows you to deduct home mortgage interest on the first $750,000 (if married and filing jointly) of mortgage debt you hold.
• Senior benefits: People over the age of 65 are often offered property tax benefits from their state. For instance, Oregon allows low-income senior homeowners to borrow money from the state to pay local property taxes.
• Installing alternative energy features: The federal government offers a tax break of up to 30% of the cost of installment for homeowners who install alternative energy sources like fuel cells, geothermal heat pumps, and wind turbines on their property. While this won’t directly affect your property taxes, the reduced energy costs can save you some money.
• Veteran benefits: There are many property tax benefits available to veterans, although some states will only provide them if you’ve been disabled. Here’s a state-by-state list of the property tax exemptions available to past service members.

These are just the most common tax breaks, so check with a local CPA to see if there are other benefits available in your state.

If you’ve applied all the available tax breaks and still think the bill is too high, Reece tells us that “you can dispute your property tax assessment at your local county auditor’s or treasurer’s office.” However, Reece also points out that you typically need to file these disputes within 30 to 60 days of receiving your assessment, so don’t delay.

When property taxes are lower, other taxes are higher (usually)

Nationwide, local governments rely on property taxes for over 70% of their revenue, and use these funds to pay for public schools, government services, construction projects, and more. If a county or city has low property taxes, they’re likely to raise taxes in other areas in order to compensate.

For example, Louisiana’s median property tax rate is only 0.53%, but local sales tax rates are just below 10%. Similarly, in Nevada, the average local sales tax is 6.85%. These sales tax rates are quite significantly higher than the national average local sales tax of 1.45%.

Key takeaways

Property taxes (and taxes in general) are complicated, and many people feel lost when trying to figure out how to save money. For tailored advice, consult a local CPA. And in the meantime, remember these key property tax takeaways:

• Your local government is the entity that levies your property taxes.
• States can set general guidelines for how counties assess and charge for property tax.
• There are both federal and state-level benefits that can help you save big money on your property taxes.
• Don’t move to a state just because property taxes are low — other taxes are likely higher to compensate.

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While your book club pals have been swapping the names of mortgage brokers, you’re wondering whether you should jump on the refinancing bandwagon. After all, you wouldn’t want to miss out while everyone else is saving big bucks. So should you refinance?

With a refinance, you apply for a new home loan to pay off your existing mortgage. Most homeowners refinance to lower their interest rate, lower their monthly payment, or cash out on equity. The decision to refinance doesn’t boil down to simply lowering your interest rate, decreasing your monthly payment, or cashing out equity. For example, a homeowner with a goal to pay off their loan as quickly as possible could benefit by refinancing from a 30-year mortgage to a 15-year term, even if the monthly payment increases.

“There are many different ways a refi can be beneficial for someone. It’s all about what the borrower is trying to achieve,” comments Richie Helali, HomeLight’s Mortgage Sales Lead.

But refinance loans aren’t free. You’ll have to pay lender fees and third-party expenses to close your new loan. And there are some situations when, even with a lower interest rate or monthly payment, you may want to hold off on refinancing your home loan.

We asked Helali to weigh in on when a homeowner should step back before filling out that mortgage refinance application. Read on to discover why your overall financial picture plays a bigger role than a low-interest rate in determining whether or not you should refinance.

Think twice about refinancing if…

1. You’re planning to sell in the next few years

Between lender fees and third-party charges, refinancing can cost 1% to 1.5% of your loan amount, says Helali. For example, if your refinance loan saves you $150 per month and you’re planning to move in a year, you’d lose money if you spend $3,500 in closing costs.

One way to figure out whether it’s worthwhile to refinance is to calculate your break-even point, or the amount of time it will take to recoup the closing costs. To do that, Helali says to take the total closing cost and divide it by the amount you’ll save every month.

So, if refinancing costs you $15,000 and drops your monthly mortgage payment by $150, it will take 100 payments (or just over eight years) before you recoup the cost. If you’re planning to sell before the break-even point — eight years, in this example —  you end up losing money.

2. You haven’t built up substantial equity

Interest rates may be at historic lows, but if you don’t have at least 20% in equity it may be better to wait until either your home’s market value increases or you pay down your loan balance. If you refinance with less than 20% in equity, you’ll have to pay for private mortgage insurance (PMI) (or mortgage insurance for federally insured loans) or accept a higher interest rate. In some cases, lenders could also charge you more in closing fees.

If you plan to refinance with a cash-out loan (known as a cash-out refinance), the amount of equity you have is even more crucial. That’s because the equity in your home determines how much a lender is willing to loan — and how much equity you can cash out. “The more equity you have, the more cash would be potentially available to you,” says Helali.

To figure out how much equity you have, calculate your loan-to-value (LTV). First, divide your current loan balance by your home’s estimated value which will give you the LTV percentage. Then subtract the LTV from 100% and you get your equity percentage.

Not sure what your home is worth? Plug your address into HomeLight’s value estimator for a free automated valuation.

For example, a home with a $300,000 loan balance and a valuation of $400,000 has an LTV of 75%. Subtracting this figure from 100%, you have 25% equity.

3. You plan on applying for an adjustable-rate mortgage (ARM)

While fixed-rate mortgages maintain the same rate throughout the life of the loan, ARM loans only have a fixed rate for the set introductory period, usually 5, 7, or 10 years. After the introductory period, the rate adjusts at fixed time intervals. The interest rate changes based on the market index listed on your loan note, along with your lender’s margin.

For example, a 5/1 ARM has a set interest rate for the first five years of the loan. After the initial term, the rate fluctuates based on the market conditions of each year thereafter. To determine the adjusted rate, add the current index rate and margin as detailed in your mortgage note.

If your loan note lists the 6-month London Interbank Offer Rate (LIBOR) as the index and 2.5% as the margin, your fully indexed rate at the time of your rate adjustment would be the sum total of the two. So if your interest rate had reset in January 2021 when the LIBOR rate was 0.25%, your adjusted rate would have been 2.75% (2.5% margin plus 0.25% LIBOR) until the next adjustment period.

While it can be tempting to refinance into an ARM loan, which often has a lower introductory rate than a fixed-rate loan, it isn’t the right choice for everyone. After the introductory period, there’s a chance that the interest rate (and your monthly payment) could increase when the rate adjusts.

If you refinance to an ARM loan, the adjustable rate could make budgeting difficult, particularly if you’re on a fixed income or if your income fluctuates (if much of your income is commission-based, for example).

4. You recently refinanced your home loan

You refinanced a few months back, but interest rates have continued to drop. Should you refinance again? There are two factors you should consider: how much you paid in closing costs for your recent refinance and the cost to close on another loan.

If you haven’t hit your break-even point on your last refinance, you may want to reconsider — you’ll end up paying closing costs all over again with another refinance.

5. You have a low loan balance

Chances are, if you’re well into paying down your loan, most of your monthly loan payments are paying down your loan balance. The further along you are in your loan payment schedule, the smaller the percentage of your payment goes toward interest fees.

The bottom line: A lower interest rate probably won’t save you much. When considering the closing costs, refinancing a small loan balance may not have much financial benefit (that is, unless you’re planning to tap into your equity).

Also, it may be tough to find a lender that will accept a loan application for less than $100,000. Some lenders shy away from small-dollar refinance loans because they aren’t as profitable as larger loan amounts.

6. You recently turned your side hustle into a full-time gig

Did you ditch your day job less than two years ago? If you had a salaried position when you applied for your current loan and have since transitioned to running your own business, it could be tougher to get your refinance loan approved.

That’s because loan underwriters scrutinize self-employed borrowers differently than W-2 employees. Freddie Mac and Fannie Mae, the federally backed mortgage companies that buy and guarantee loans issued by lenders, require at least two years of self-employment to prove stable income.

Less than two years of self-employed income could be acceptable in certain situations, but you’ll have to document:

• Sustained or increasing income
• Your experience in the business, and
• Demonstrate that the marketplace accepts the service or products of your business

7. You’re happy with the loan program and terms you already have

You shouldn’t feel pressured to refinance just because mortgage interest rates are low. If you don’t want to go through the time, effort, and paperwork of refinancing your loan, don’t feel bad about opting out.

“Refinancing is not required,” says Helali. “If you don’t feel comfortable refinancing, that’s OK, especially if you’re comfortable paying what you’re paying right now.”

Hold off on refinancing if a new loan doesn’t meet your financial goals

Consider refinancing your mortgage loan as a tool to benefit your financial situation, not as bragging rights for scoring the lowest interest rate. Even if you’re quoted an ultra-low interest rate, it may not be the right time for you to refinance. Consider the big picture first, including:

• Your current interest rate versus a new interest rate: Your new interest rate will not only impact your monthly payments but also how much interest you’ll pay over the life of the loan;
• Your loan amount: A higher loan amount could mean a higher monthly payment unless it’s balanced out with a lower interest rate;
• Your loan program: Moving from a fixed-rate loan to an adjustable loan could make it harder to budget for future mortgage payments;
• Your break-even point: Ensure you’ll be in your home long enough to recoup your closing costs with monthly interest savings;
• Your credit status: A change in your credit profile since your last loan application could make it more difficult to get a loan approval;
• Your financial goals: Would you rather have a lower monthly payment, cash out equity, or pay down your balance quicker? Your financial profile and goals will help you decide which loan program suits you best; and
• How the refinance will benefit you: A lower interest rate is just one potential benefit when refinancing. You can cash out equity or change your loan program to suit your personal goals.

Still debating whether or not you should refinance?

You could test the waters by speaking with a few different lenders to learn more about their application and underwriting processes. If you’re still on the fence about refinancing, find out whether the lender charges an upfront fee before you get too far along in the process. Some lenders charge a non-refundable upfront fee to pull your credit report or order an appraisal, while others may require a fee to take your initial application.

Still having trouble deciding? Reach out to a financial advisor to explore whether it’s a good time for you to refinance your mortgage.

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In any case, can you sell a house with back taxes owed?

“I had a listing where there was about $75,000 in back taxes on the property,” says Greg Clark, a top real estate agent in Waco, Texas. “That’s problematic if there’s not enough equity, but there happened to be enough equity in the house that we could pay it out of proceeds.”

While unpaid taxes will add an additional layer of complexity to the sale, real estate agents and attorneys encounter this situation more often than you might realize — and have the solutions to help. If you’re concerned back taxes could be a blocker to your sale, you do have options to pursue.

We’ve put together this thorough guide to selling a house with back taxes, which will cover:

• What are back taxes?
  • Income taxes
  • Property and municipal taxes
• How can I tell if I owe back taxes?
  • Look up taxes owed by name or address
  • Run a title search
• Options to settle your debt
  • Use your sale proceeds to cover the unpaid taxes
  • Work with an investor or house-buying company to resolve the debt
  • Negotiate with the buyer to work out a deal
  • Pursue an offer in compromise
  • Pay off the taxes, but expect a waiting period

What are back taxes?

Taxes fall into three basic categories, according to the Tax Foundation of Washington, D.C., the nation’s leading independent tax policy nonprofit organization. These include:

• Taxes on what you earn, such as individual or personal income tax based on salaries, wages, and investments
• Taxes on what you own, such as property taxes, which are also called real estate tax or “real” property tax
• Taxes on what you buy, such as sales tax, which provides revenue to states and municipalities based on items you purchase at a set rate

Any one of these types of taxes becomes a “back tax” when it goes unpaid and becomes past-due. According to Jeffrey L. Nogee — a New York City-based partner at the nationwide firm Tully Rinckey PLLC — unpaid income taxes and unpaid municipal property taxes can attach to your property.

Income taxes: Federal, state, and municipal

If you neglect or fail to pay your federal income tax debt, the Internal Revenue Service (IRS) can make a legal claim against your property called a Federal Tax Lien that alerts creditors the IRS has a legal right to your property. The IRS filed 291,081 federal tax liens against individuals and businesses in 2020, about 46% fewer than in 2019, agency data shows.

In addition to federal income tax, 42 states levy income taxes. Those that have no state income tax are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Your state can place a lien on your property for unpaid state income tax, as can some municipalities that also levy income tax. New York City and Yonkers, for instance, have their own income tax on top of the state’s income tax. 

Property and municipal taxes

Property taxes are an essential revenue source for state and local governments, which use these funds for public services such as police and fire departments, schools, and roads. The Tax Foundation says that property taxes nationwide account for over 70% of total local tax collections.

Within this category, however, you also might have a county tax as well as a separate city or village real estate tax, as well as tax relief that might or might not apply to the current property owner.

For instance, New York State’s School Tax Relief (STAR) program offers property tax relief to eligible homeowners: a basic version for most anyone and an enhanced version for seniors, Nogee says. “The problem comes when someone who had the enhanced STAR dies. The enhanced exemption dies with that person, so technically, the school tax portion of the real estate tax is increased back to the non-exempt level.”

How can I tell if I owe back taxes?

If you haven’t received a bill or legal notice through the mail, you can search online for how to view any tax balance and payment activity or do a title search.

Look up taxes owed by name or address

The IRS allows taxpayers to search securely for any amount owed. For state taxes, search for the department of taxation and finance or the state comptroller. As for property taxes, search for your county, city, or village tax entity online. For example, residents in Waco, which Clark serves, can search for their property balance by name or street address via the McLennan County Tax Office and pay by check or credit card.

Run a title search

One of the most sure ways to discover any liens or back taxes owed is to talk with a real estate agent about coordinating a title search for you. “When I list a home, I always open the title work first, which gives the title company a bit of a head start,” Clark says. “What I don’t want to do is delay closing because of any of these issues.”

Statistics from the National Association of Realtors show that titling and deed issues delayed 10% of contracts in June 2021 and terminated 3% of them. Giving the title company ample time to find any money owed also allows you time to discuss how to handle any back taxes owed and other debts before your home goes under contract.

Unfortunately, some records also aren’t reported accurately or in a timely manner. If you have proof that you’ve paid your tax debt, talk with a tax adviser about disputing a bill that still shows as unresolved, Nogee says.

Options to settle the debt

You can sell a house with back taxes owed as long as you have a plan to resolve the debt. However, you’ll want to choose a solution that allows for adequate timing and is appropriate for your tax liability. Let’s look at a few pluses and drawbacks of these:

1. Use your sale proceeds to cover the unpaid taxes

When you sell a home, some of your proceeds will go toward paying various fees. These include real estate transfer taxes, title fees, and agent commissions. According to the IRS, if you have enough equity in your property, the lien is paid out of the proceeds at the time of closing, similar to all your other fees owed at the end. Agents and attorneys such as those we’ve consulted express that this is the most common and streamlined solution to selling a house with back taxes.

Here are a few benefits to going this route:

• You don’t have to drain existing savings
  “As long as the equity is greater than what’s owed, the easiest path would be to use the proceeds because nobody’s writing a check out of pocket,” Clark says, noting that this is especially helpful in estate situations with more than one heir.

• It’s money you never ‘see’
  At the time Clark spoke to HomeLight, he represented a seller who planned to use the proceeds to cover about $4,300 in state taxes owed on a three-bedroom, two-bath home of about 2,000 square feet. “Most people are more comfortable paying [the debt] out of proceeds because they never see that money,” he says.

• Cover fees in one fell swoop
  Nogee says that sales proceeds also resolved a foreclosed mortgage and about $100,000 of monthly maintenance charges on a two-bedroom co-op after the original owner died. The property sold for about $500,000. “Selling the property and paying off the mortgage, taxes and other debts that could be a lien on the property is the best way to go,” Nogee says.

What if the proceeds fall short?

If the home sells for less than the lien amount, you can request that the IRS discharge the lien, which removes the lien from the property to complete the sale to a new owner. (You’d still owe whatever tax debt remains, and the IRS recommends filing this application at least 45 days before you need notice of this certificate.)

Get the right help

When you’re selling a house with an extra hurdle such as a tax lien, it’s important to partner with a real estate agent who knows what they’re doing. If you’re looking for a reputable agent with the right experience in selling homes with tax liens, HomeLight would be happy to introduce you to a few highly skilled agents in your area. It’s also recommended to hire a tax specialist or tax attorney to handle remitting payment and to ensure that the title company receives the appropriate paperwork.

2. Work with an investor or house-buying company to resolve the debt

Real estate investors are less likely to shy away from homes with title issues such as a tax lien. Whether you work with a large house-buying company or local home flipper, investors have the capital to pay all-cash and usually offer to buy your home “as is”, resolving your debt in the process.

Your buyer would still need to account for the cost of paying the lien in what they’re willing to offer you for the property, which could result in a discounted price. However, a lower price may be worth it in exchange for a quick and easy closing.

If this option interests you, we’d recommend checking out HomeLight’s Simple Sale platform. Through Simple Sale, HomeLight provides you with a full cash offer for your home. You can skip the repairs and prepwork, and go straight to receiving an offer. You also won’t pay the typical agent commission fees of 5%-6%.

3. Negotiate with the buyer to cover the taxes

Buyers love hardwood floors and great curb appeal. But a tax lien that comes with the property? Not so much. That said, it’s not unheard of for sellers and buyers to find a way forward and clear the lien. Perhaps it’s a hot seller’s market or your property offers the buyer value in other ways that makes them inclined to compromise with you.

Clark says as long as the buyer’s mortgage covers the cost of the property, and the buyer and the buyer’s agent are agreeable, the parties can negotiate how to handle the closing costs so that the seller has enough to pay the outstanding taxes. “It would be done as a buyer credit back to the seller for discretionary spending,” he says.

4. Pursue an offer in compromise

The IRS also has an offer in compromise that allows taxpayers to settle their tax debt for less than a full amount if they can’t pay it in full, or if doing so would create a financial hardship. The IRS accepted only about one-third of the offers proposed in 2020. The agency says that “absent special circumstances,” it will not accept such offers if it thinks the liability can be paid in full through a payment agreement or a lump sum.

5. Pay off the taxes, but expect a waiting period

The IRS says that the easiest way to get rid of a federal tax lien is to pay it in full. Simple enough, right? Well, except for one detail: The IRS will release the lien within 30 days of receiving your payment. Even at the state or local level, this waiting period can create a problem at closing. “Sometimes people will send in $3,000 to pay the tax bill for the quarter two weeks before closing, and it won’t get recorded in time,” Nogee says.

The only way you can close that day is to give the title company $3,000 in escrow, which it will hold for a fee until it has proof that the taxes were paid; then it will return the escrow. “So you wind up paying twice, at least for a little while,” he says. For this reason, paying off the debt using the sale proceeds is typically the favorable option.

Sell now if it means paying off those taxes

Don’t hesitate to resolve unpaid taxes. Not only can this debt make it complicated to sell your home, but the IRS charges interest from the date those taxes are due until they’re paid in full. You’ll shell out the federal short-term rate plus 3%, with interest compounding daily.

Knowing that, using the equity in your home to pay those taxes off is often the obvious solution. When in doubt, reach out to a knowledgeable tax attorney and top real estate agent to guide you through this process. If the need to sell is urgent, reach out directly to Simple Sale for a full cash offer and a low-hassle sale. It may be overwhelming to get started when you’re dealing with back taxes on top of an already-complex process, but you do have options!

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With a refinance, you take out a new loan on your house and use that loan to pay off your existing home loan. Getting a refinance isn’t free, but even taking the cost into account, you could end up saving in the long run.

For all the details, we spoke with Richie Helali, HomeLight’s mortgage sales lead, about estimating refinance costs, shopping around for the lowest fees, and weighing whether or not you should refinance.

Refinance closing costs generally run 1% to 1.5% of your loan amount

Expect to pay around 1% to 1.5% of your new loan balance toward closing costs for a refinance loan, says Helali. For example, if you have a $250,000 refinance loan, you’d likely be on the hook for between $2,500 and $3,750. That expense includes both lender fees and third-party settlement costs like title fees.

Helali also notes that the way you structure your loan could drastically affect the cost of your refinance. You may have the option to pay extra fees in the form of discount points to lower your interest rate. Discount points are a type of prepaid interest denoted as a percentage of the loan amount. In exchange for paying this interest fee upfront, the lender reduces your rate. For example, instead of a rate of 2.875% with no points, you could opt for a lower rate of 2.5% by paying a 1% of your loan amount upfront. This tactic is sometimes referred to as a “buydown.”

Your interest rate can influence how much you pay in closing costs — and vice versa

If your number one priority is to pay less in upfront fees, you may be able to opt for a higher interest rate with a lender credit that pays for some or all of your closing costs. If your primary goal is the lowest rate possible, you could choose to pay down your rate in the form of discount points. This balancing act, says Helali, can help you adjust the refinance cost based on your financial goals.

For example, your lender could offer two rate quotes for a 30-year fixed-rate mortgage. The first option, at a rate of 2.5%, costs $10,000 in closing fees. The second option, at a rate of 2.875%, has a lender credit covering all closing costs. The lower interest rate comes with higher closing costs while the higher interest rate comes at a lower (or in this case, zero) upfront cost. How would the different rates affect your interest fees over the life of the loan?

For a loan amount of $250,000 and a rate of 2.5%, you’d pay a little over $105,000 in interest over the life of the loan. In comparison, a 2.875% rate would result in more than $123,000 in interest fees at the end of the 30-year loan term — a difference of approximately $18,000.

No-closing-cost refinance loans can eliminate upfront fees

Some lenders promote no-closing-cost refinance loans as exemplified above, but the term is a misnomer. With this loan type, refinance costs still apply. You simply don’t pay for the fees upfront at closing.

No closing cost refinance loans work in one of two ways:

• You pay a higher interest rate and receive a lender credit that covers your closing costs, or
• You wrap the fees into your mortgage by increasing your loan principal amount to cover the fees

While you won’t have to write a check for closing costs, it’s important to note that you could end up paying more over the life of the loan. With a higher interest rate, you’ll be paying more in interest fees.

Breaking down the cost to refinance

If the following closing costs look familiar to you, it’s because you’ve probably seen them before when you took out a mortgage to purchase your home. Refinance loan fees are “mostly identical” to the lender and third-party loan fees you’d see during a home purchase, says Helali. However, refinancing fees may be slightly lower— typically by 5% to 10% — than loan costs for buying a house, he adds.

Weigh the cost of refinancing against the benefits by calculating your break-even point

Here’s one factor to consider when weighing the cost to refinance: your break-even point. Based on how much you save every month by refinancing, how long will it take to recoup the closing costs?

Helali shares how to calculate your break-even point: Divide your refinance closing costs by the amount you’ll save each month on your monthly payment. The end figure tells you how many monthly payments it takes before you break even on your refinancing costs.

For example, let’s say closing costs on your refinance loan add up to $3,500. Mortgage rates have dipped to historic lows, and you calculate a savings of $400 per month with the new loan. Dividing $3,500 by $400, it would take just under nine months to recoup the costs.

On the other hand, let’s say the rates aren’t quite so low, and the monthly savings amounts to just $100 per month. With the same closing costs, it would take 35 months, or almost three years, to break even.

If you’re planning to stay in your home for well over three years, it could be worthwhile to refinance under either scenario. But if you’re thinking about moving in the next two years, the cost to refinance in the second scenario would be more than what you’d save every month.

You can save on closing costs by shopping around for both your lender and settlement company

Some fees, such as government recording fees and appraisal fees, aren’t negotiable. But you can still shop for the best deal by comparing fees between different lenders, settlement representatives, and title companies.

Compare different lenders and loan programs

When you’re shopping around for a refinance loan and comparing lender closings costs, weigh these factors:

Lender-specific fees

Separate the lender fees from the settlement costs and third-party fees so you can compare apples to apples.

“Specifically on a fee quote, one thing that’s really smart to ask about is, what are the lender-specific fees?” advises Helali.

“The reason I say, for the most part, to focus on lender-specific fees is that [those fees] —and the interest rate and the service level — are what’s going to differentiate one lender from another.”

Multiple rate and fee quote combinations from each lender

In addition to zeroing in on lender-specific fees, Helali suggests getting three rate quote combinations for each loan program you’re comparing:

• The lowest interest rate offered where you pay for all of the closing costs
• The (usually higher) interest rate offered where a lender pays for the closing costs, and
• A combination of the two — an in-between interest rate where you get a credit to pay for part of the closing costs

“It’s good to use that as a comparison to go to lender A, lender B, lender C just to see what the differences are,” Helali adds.

Your financial goals

When comparing lender programs, you’ll also want to factor in your reason for refinancing. Are you focused on lowering your monthly payment, or are you hoping to cash out to consolidate your debt?

If lowering your monthly payment is a priority, it could be worthwhile to pay discount points upfront for a lower interest rate.

On the other hand, if you’re paying off credit card debt with a cash-out refinance, you may want to opt for a lender credit and higher loan amount or interest rate to avoid paying for closing costs out of pocket.

Shop around for settlement services and title insurance

In many cases, a lender works with a preferred settlement agent and title company. When a new loan application comes in, the lender automatically sends the file to this preferred company. But Helali says you don’t have to use the company your lender recommends.

“One thing a lot of people don’t know in a refinance — a client can shop for their own title and escrow company,” he reveals. If you’re looking to save on closing costs, call settlement agents and title reps in your area to compare fees.

Ask about discounts you may be eligible for, such as a discount for repeat customers (if you’re refinancing with the same title company that holds the policy on your existing home loan). Also, if your home has been insured by a lender’s title policy in the past ten years, you may be eligible for a  discounted substitution rate. When applicable, the title company reduces its rate when it covers an existing homeowner with a new mortgage. The title company may require proof of prior title insurance before issuing this discount.

Is the cost to refinance worth it? Factor in more than closing fees

All refinance loans have some manner of cost attached. Your best bet? Don’t base your decision solely on fees or solely on interest rates.

“Target the best fee and rate combination that works for you,” says Helali. Then compare your loan options to your current loan before making a decision. “It all depends on what [your] goal is, what the purpose of the refinance is.”

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You just landed a big promotion, along with a healthy pay raise. There’s a glass of bubbly in your hand, and the lyrics to “Mo Money Mo Problems” are running through your head as you debate where to channel your extra disposable income. Should you pay down your mortgage to live debt free, or invest to harness the power of compound interest?

In this hotly-debated dilemma, one side argues that freedom from mortgage debt should be the priority. Paying off your loan significantly reduces your living expenses, providing stability in the event of a job loss or retirement. Plus, if you prepay your mortgage (i.e., make extra payments on the principal loan balance), you could save thousands of dollars in interest over time.

The other side disagrees, believing that investing is the best way to get ahead financially. If you earn compound interest on your investments, eventually, your investment earnings will outweigh your mortgage interest; in other words, you’ll make significantly more money from interest on your investments than you’d save by paying off your mortgage early. This latter group follows Einstein’s adage about interest: “He who understands it, earns it; he who doesn’t, pays it.”

To discuss what factors homeowners should weigh before allocating their extra cash, we asked Drew Kavanaugh, Certified Financial Planner (CFP®) and vice president of Odyssey Group Wealth Advisors, for his insight. Kavanaugh stresses that the answer lies in more than a numbers-based calculation. Both your financial situation and personal sentiments can factor into your decision.

Here’s what you should take into account when weighing up if you should pay off your home or invest:

1. Your mortgage interest rate vs. the rate of return on investments

To compare your options, start by weighing your mortgage interest rate (interest you’re paying) against the projected interest rate on your investments (interest you’d earn).

If your investments could earn more interest than you would save in interest on your mortgage over the loan period, then investing may seem like a good option that helps you gain wealth.

Historically, the stock market averages 10% returns annually (closer to 6% or 7% of “real returns” when accounting for inflation). Comparatively, the average 15-year and 30-year mortgage interest rates have ranged from 2.16% to 4.94% in the past 10 years, according to Freddie Mac.

If you take these numbers at face value, investing may seem like a no-brainer. However, the reality is more complicated. Register these concepts when strategizing:

The stock market can be lucrative but it’s also unstable

The stock market’s average return of 10% doesn’t equate to you earning a 10% return on your investments every year. Market conditions sway dramatically and unpredictably.

To borrow a visual from historian Niall Ferguson’s The Ascent of Money: A Financial History of the World, if you plotted movements in stock market indices on a graph, you wouldn’t see a neat bell curve with most points clustered at the peak around 10%. There would be many more extreme high and low points on either side of 10%, forming a trend that statisticians like to call “fat tails.”

Market dips are inevitable and can be extreme in nature. There have been nine market crashes of 20% or more in the past century. It can take the market years to recover after a tumble and even a decade or longer to recover after a major crash like The Great Recession.

As an investor, you gain or lose money depending on what’s happening in the market at a set moment in time. So while your mortgage rate remains more or less stable (depending on if you have a fixed- or variable rate), your annual interest on your investments peaks and valleys over the years. This variation means that the interest on your investments won’t always net you gains — you may even lose money on your investments from time to time.

Bottom line: If you plan to invest your extra earnings, you’ll need to strap in for the long game to truly reap the market’s 10% average return.

There are tax perks to keeping your mortgage

Don’t throw in the towel on investing and commit to paying off your home faster just yet. People who advocate for prioritizing investing point out that tax deductions effectively reduce the impact of the interest you pay over the course of your mortgage.

With the home interest mortgage deduction (HIMD), homeowners have the opportunity to deduct the amount of mortgage interest paid throughout the year from their taxable income, which reduces the amount of tax they will owe. You may be able to deduct 100% of your mortgage interest paid in the previous year, or only a portion of it, depending on your mortgage size and when you acquired the debt due to the way tax rules have changed.

If this tax deduction means you won’t save significant interest by paying off your mortgage early, it could be a better bet to invest your extra earnings.

2. Your tolerance for risk

There’s a chance that investing in the stock market could get you further ahead financially than paying off your mortgage early would. But the market can be volatile, and stock market investments aren’t guaranteed. If you’re in a tough financial spot and need to liquidate your stocks during a market dip or correction, they could be worth less than you paid for them.

Many people see their home as a less risky type of investment. As you pay down your mortgage principal, you build equity in your home. If you’re in a crunch, you can withdraw equity from your home in the form of cash with a Home Equity Line of Credit (HELOC), a home equity loan, or a cash-out refinance. There’s also always the option to sell your home and walk away with your equity, minus whatever closing costs you owe at the end of the sale.

So to wrap up, if market ups and downs don’t deter you, and the thought of potential investment returns puts a spring in your step, investing your extra cash could be the right choice. If the opposite is true, paying down your mortgage may be a better fit.

3. Your current financial standing

You need to look at your whole financial picture when deciding to pay off your home or invest. Speak with a financial advisor to understand how the following factors impact which option will help you get further ahead.

Overall debt balance

Does your debt vastly overshadow your savings and investments? Using excess income to lower your mortgage principal reduces the debt balance faster than making minimum payments. For many, carrying a large loan balance with a high monthly payment can feel burdensome. If you’re in this camp, it could be a huge relief to tackle your mortgage debt aggressively.

But before you start prepaying your mortgage, compare the interest rates across your loans and credit lines. Kavanaugh recommends paying off high-interest debt, such as credit cards, before paying off your mortgage.

Income tax status

If you itemize deductions, you may want to think twice about paying off your mortgage and losing the mortgage interest tax deduction. This is particularly important if your taxable income is borderline with a higher tax bracket. Losing the deduction could increase your taxable income, bumping you into the next tax bracket and increasing your income tax bill. Consult with a tax professional about potential tax implications before you pay down your mortgage.

Diversification of current assets

Consider how your assets are currently diversified. If you have ample home equity and no investments, or vice versa, you could have a risky imbalance. According to the U.S. Securities and Exchange, you can reduce risk by putting your money into different asset categories.

Putting all of your extra funds into your home while ignoring other investment opportunities, for example, puts most of your assets in one place. In a dire real estate market where property values dip — as we experienced during the Great Recession — you could lose some or all of the equity you’ve built up in your home. A joint report by The Russell Sage Foundation and The Stanford Center on Poverty and Inequality notes that U.S. households lost more than $7 trillion in home equity during the Great Recession.

4. Your short-term, medium-term, and long-term financial goals

Consider your financial goals for the next year, the next five years, and beyond. Are you planning to start a business? Send a child to school? Buy a new car? Your future plans can affect how you choose to allocate your extra income.

For example, a younger couple with a child may consider accelerating their mortgage payments to pay off the debt by the time their child enrolls in college. Without the monthly mortgage payment, “they will have additional resources to help with college funding,” Kavanaugh says. But that doesn’t mean every penny should go toward the house. “It’s just one budgeting silo in the comprehensive financial picture,” he adds.

5. Your retirement timeline

If you’re closing in on retirement, putting extra payments toward your mortgage balance brings you closer to owning your home outright. While paying off a mortgage doesn’t make sense for every retiree, eliminating this large monthly payment can significantly increase your monthly budget and improve your lifestyle.

The further you are from retirement, the stronger the case is for investing your extra earnings. You have more time to recover from market fluctuations and take advantage of compound interest, which maximizes its benefit over time. By the rule of 72, a shortcut for calculating compound interest, if the stock market returned 10% annually your investment would double after 7.2 years. The power of compound interest could net you major returns.

If you were to invest a $10,000 bonus at a 10% annual rate, you’d walk away with nearly $175,000 (before taxes) in 30 years — without ever adding another penny. You don’t even need a large lump sum to leverage compound interest. Want to be a millionaire? A $550 monthly investment earning 10% annually gets you there in 30 years.

6. Your moving plans — or lack thereof

If you’re planning to move in the next few years, Kavanaugh says it’s probably best not to pay down your mortgage debt with your extra income. Keeping the funds liquid gives you flexibility to increase your down payment for your new home, he notes. And if you’re staying in your home for the foreseeable future? Kavanaugh says to consider all the other factors listed to weigh up if you should pay off your home or invest.

Let’s recap the deciding factors

One factor alone probably won’t sway your decision toward paying down your mortgage or investing the funds. Consider each option holistically, looking at the benefits and drawbacks of each to help clarify your choice.

Think about investing if…

• You’re confident you’ll earn a higher returns investing than you’ll save in mortgage interest
• You aren’t anxious when the stock market fluctuates
• You don’t plan on retiring for many years

Consider prepaying the mortgage if…

• You’re uneasy about your mortgage debt balance
• You’re nearing retirement
• You don’t need the mortgage interest tax write-off

Meet with a financial advisor for tailored advice

Ultimately, there isn’t a simple answer to whether paying off your home or investing money in the market is better. When it comes to personal finance, everyone’s situation is unique. If you’re overwhelmed about making a decision or are unsure about your next step, reach out to a financial advisor for guidance.

Search for a local professional through the National Association of Personal Financial Advisors or the Certified Financial Planner (CFP®) Board. By partnering with an experienced advisor, you’ll spend less time worrying about financial missteps and more time celebrating your financial success.

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However, homeownership comes with an array of financial obligations. A recent Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics reveals that homeownership costs an average of $9,552 annually, or just under $800 a month.

So where does all the money go? If you’re a new homeowner or looking to buy a home, read on to learn about the top 12 most common homeowner expenses.

Mortgage payments: You pay more than the principal

While almost all rookie homeowners expect their mortgage payment to be a big chunk of change, many are caught off-guard by the line items of each payment. That’s right, mortgage payments don’t just pay off the money borrowed by the homeowner (aka the principal). The payment is broken down into four parts:  principal, interest, taxes, and mortgage or private mortgage insurance (PITI).

1. Interest

Anyone who has experience taking out loans knows that borrowed money comes with a price: interest. This fee is what the lender charges for loaning money to the borrower. The interest rate of any given loan depends on the borrower’s qualifications and down payment amount, type of mortgage, and mortgage terms.

Currently, the national average for interest rates is 2.98% for 30-year fixed mortgages and 2.51% for 15-year fixed mortgages. And while you may have seen the headlines that interest rates have been at historic lows, that doesn’t mean that your interest won’t still add up to a considerable sum.

For example, a homeowner with a $200,000 30 year-fixed rate mortgage and an annual interest rate of 2.98% would have a monthly interest payment of 0.248% on their outstanding loan balance. This means that during the first month of this mortgage, the homeowner would pay $496.67 in interest alone.

Feeling overwhelmed? Take some consolation in the fact that the interest charges for your earliest mortgage payments will be the highest. Because interest is calculated against the principal amount, as you pay down the principal, the interest proportionally decreases.

2. Taxes

With the benefits of homeownership, so too come the burdens; and property taxes rank among the largest encumbrances for homeowners. Local counties and townships levy property taxes based on homes’ assessed values to fund public services like schools and fire departments.

Because property taxes are in the hands of local governments, rates vary greatly by location. For reference, Hawaii has the lowest average property tax rate at 0.30% while New Jersey has the highest at 2.21%.

To ensure that you don’t get caught off-guard by this homeowner expense, consult your real estate agent to determine your local tax rate.

Top real estate agent Jim McPhail, a licensed realtor in Lancaster County with 30 years of experience, shares his team’s process of preparing buyers for property taxes:

“Before the buyer ever even makes an offer on a home, we have their lender do a cost estimate for them on that particular property, so they’ll know almost to the penny what their payments are going to be and how much cash they’re going to need. So there’s not going to be any unexpected surprises.”

McPhail emphasizes the importance of doing this for every property the homebuyer is seriously considering, “Those numbers will vary house to house. So even if you can have two homes, the same price range, those numbers will vary greatly because of variables such as real estate taxes.”

3. Private mortgage insurance or mortgage insurance

Private mortgage insurance (PMI) is a policy that protects lenders from the risk of a borrower defaulting on their payments. If your down payment was less than 20% of your home’s cost, and you’re using a conventional mortgage, then your lender will likely require you to purchase this policy. The total cost of your PMI policy depends on several factors, but you can generally expect between a rate of 0.5% to 1% of the loan amount per year.

Mortgage insurance offers the same protection to lenders for federally-insured loans like Federal Housing Administration (FHA) loans. All FHA loans where you put less than 20% down will require mortgage insurance. USDA loans don’t require mortgage insurance, but they do charge a guarantee fee upfront and annually.  Fees for government loans depend on the type of loan and how much money you borrow.

For example, as of 2021, the upfront mortgage insurance premium for FHA loans is 1.75% and annual MI fees depend on your loan-to-value ratio, while the USDA guarantee fee is just 1%, plus an annual fee of 0.35% of the loan amount. Note that Department of Veterans’ Affairs backed loans (VA loans) do not require mortgage insurance, regardless of the down payment amount, but they do charge a funding fee.

Home maintenance

The independence of homeownership also means that you’re on your own when it comes to maintaining your abode. Unfortunately, a big part of assuming these responsibilities is footing the bill. Below are the biggest unexpected expenses associated with home maintenance.

4. Major home repairs

“In today’s current market, a lot of buyers are waiving their inspections to make their agreement a competitive offer, and we do share with them to be prepared that there could be some repairs needed to the property,” shares Craig Hartranft, an expert real estate agent who has sold an overwhelming 97% of his listings.

And those home repairs can cost you big time. Even if you didn’t forgo a home inspection when purchasing your home, you may need to shell out for some of these expensive home repairs throughout ownership:

• Foundation repairs: $2,015 – $7,081
• Roof replacement: $5,569 – $11,431
• Water damage repairs: $1,201 – $5,114
• HVAC replacement: $5,000 – $10,000

5. Home warranty

McPhail offers a helpful tip for new homeowners to combat the cost of major repairs: Purchase a home warranty policy. Warranties differ from home insurance policies in that they cover the costs of repairs for internal systems to your home, like plumbing, electrical, and HVAC units. They can cost as little as $50 per month and offer significant savings to policyholders. McPhail details the benefits:

“If [homeowners] obtain a home warranty, there’s a good chance that’s going to reduce the lion share of any large unexpected expenses. And what a lot of buyers don’t realize is that they can actually renew that [policy] on a yearly basis. So it’s not just the once and done thing … That home warranty can assure homeowners that ‘Hey, if my air conditioning goes out, my heating goes out, my hot water heater fails, etcetera, I’m going have a minimal service charge, and the warranty will pick up the remainder.'”

6. Homeowner’s insurance

After making such a big purchase, homeowner’s insurance is a no-brainer (and it’s usually required by your lender); but this coverage comes at a cost of about $1,312 per year. Don’t let sticker shock deter you. This policy provides important protection by insuring your home’s structure and your belongings in case of a destructive event, like a fire.

Some policies even protect homeowners from liability, which is the homeowner’s legal responsibility in the event of injury or property damage caused by the homeowner or their family.

And if you live in a disaster-prone area, insuring your home may cost you extra. Most homeowner’s insurance policies don’t cover “acts of God” — uncontrollable events such as tornadoes, floods, or other natural catastrophes. Instead, a special policy, called catastrophe insurance, can cover damage from these events.

The cost of these policies vary depending on your home’s risk, so speak with a local insurance agent to decide what the best and most cost-effective coverage for your home will be. Local real estate agents can also provide some insight during the home buying process so that you know what to expect when your name goes on the title.

7. Landscaping maintenance

Outdoor spaces have never been more popular. In fact, in HomeLight’s recent Top Agent Insights Report, 31% of agents reported a desire for more outdoor space was a motivating factor for homebuyers.

If you’re one of those homebuyers who moved expressly to gain an outdoor space, you may be surprised by the maintenance costs that come with it. The national average to maintain an outdoor space can range from $100 to $200 per month, covering lawn care, gardening, and other maintenance.

If that range seems high, don’t let your lawn go to seed just yet. To keep monthly maintenance expenses low, prioritize native plants in your landscape design. These florae will thrive in your natural conditions and save you water, fertilizer, and other maintenance fees. Additionally, native plants may attract more local wildlife and add a dose of whimsy to your yard.

8. Pool maintenance

The COVID-19 pandemic was a cannonball for the pool industry, increasing demand for home pools by more than 200% in some places. Even after the initial installation cost, though, these personal oases can cost homeowners $80 to $350 per month for maintenance.

The cost depends on the size of the pool and type of filtration system, with larger pools and saltwater pools generally on the more expensive end of the spectrum. And if you live in a cold climate, closing or winterizing your pool costs an additional $150 to $300 each season, and another $150 to $300 to open it for the summer.

More than cleaning and filtration costs, the hidden expense of pools lie in the added utility cost. The electricity needed to run a pool can add $30 to $150 a month to your utility bills — amounting to $1,800 a year on average.

Don’t underestimate the luxury of a home pool, though. The monthly maintenance fees may feel worth it to enjoy this hub for family gatherings and summer dips.

9. Minor home repairs

While major home repairs take the crown for the biggest homeowner bill, the cost of minor home repairs can add up fast, too. These minor repairs include tasks like replacing cracked tiles and fixing faulty wiring, and cost homeowners $170 a month on average.

Don’t be tempted to think you can overlook these minor repairs to save a buck: taking home maintenance head-on can save you from higher costs down the line. A poorly maintained home could knock off up to 10% of your home’s value. Newbie homeowners can be proactive about these expenses by setting aside 1% to 3% of the home’s value or about $1 per square foot per year.

10. Home renovations

When it comes to decorating, your expenses are as big as your dreams. In 2021, home renovations and remodels cost the average homeowner $46,743; however, that figure includes the cost of mechanical and structural repairs, which accounted for a majority of the average budget. Still, realize that minor renovations can add up fast.

For example, consider the cost of these common home design projects:

• Interior painting: $954 – $2,892
• New flooring: $1,660 – $4,620
• New landscaping: $1,353 – $5,638

10. Interior decorating

After finding your dream home, closing the sale, and moving in, decorating can be a chore. Consider this: the cost to remodel a living room can cost anywhere from $1,500 to $43,200 and averages $22,350. A simple paint job will keep things on the lower end of the spectrum while adding features like built-in cabinets or bookshelves significantly increases the cost of decorating.

Enlisting the help of a designer can be a relief for homeowners who want to settle in without the hassle of DIY home design. While the convenience and expertise of a professional interior designer are unmatched, you’ll pay $2,005 to $12,848 on average for these benefits.

11. Homeowners association fees

Buying a home in a homeowners association (HOA) comes with benefits, especially for first-time homeowners looking for a secure investment. In fact, single-family homes under HOAs sell for an average of 4% more, or roughly an extra $13,500.

HOAs — organizations that govern neighborhood standards — help the community maintain property values by establishing a norm for home aesthetics and upkeep. HOA fees may help cover HVAC maintenance, roof repairs and replacements, trash pickup, snow removal, cleaning, and painting of building exteriors. They can also provide services to residents, like yard care and amenities.

These benefits come at a cost in the form of monthly, quarterly, or annual fees. HOA fees typically cost between $200 to $300 per month; fees vary depending on the size of your community and the amenities offered by the organization.

Is homeownership worth it?

Don’t be daunted by the long list of expenses; homeownership pays in more ways than one.

You may reap tax benefits

Tax breaks for homeowners are a huge help in offsetting the financial burden of owning a home. You can cash in on these benefits by itemizing your deductions and writing off mortgage interest payments, property taxes, and more (where possible).

If you don’t think itemizing your taxes is worth the effort, consider this: A homeowner filing as ‘Single’ or ‘Married Filing Separately’ could deduct $30,000 compared to the $12,400 standard deduction — that’s $17,600 worth of additional savings.

To make the most of your itemized deductions, it’s best to work with a tax professional who can help you round up the deductions you’re eligible for.

Homeownership can help build wealth

A home is a valuable asset. According to a study by the Survey of Consumer Finances, the average homeowner has a household wealth of over $230,000 compared to just $5,200 for the average renter.

Homeownership even outperforms investing in stocks and bonds over time. Unlike stocks and bonds, home appreciation value is not subject to the same tax capital gains taxes as stocks. Your home can appreciate up to $250,000 of value if you’re single, $500,000 if you’re married, before you have to pay any tax on those capital gains.

Buying is often cheaper than renting in the long run

According to The Urban Institute, an organization of social scientists dedicated to studying people and communities, homeownership remains more financially beneficial than renting. In a longitudinal study, the organization conducted on the rate of return of homeownership, owning a home offered a greater return in five of seven markets examined. The benefits were particularly striking in smaller cities and rural arrears where home prices are low.

Homeownership may even increase self-esteem

According to Harvard’s Joint Center for Housing Studies, homeownership provides people with psychological benefits that renters don’t reap.

For one, purchasing a home is a traditional right of passage for those in pursuit of the American Dream, and reaching this milestone can have positive effects on self-esteem.

Furthermore, homeowners experience increased self-efficacy and generally have more control over their environment as compared to renters who may be subject to the whims of their landlord.

Learn more about homeowner expenses from a pro

Instead of being deterred by the costs of owning a home, connect with an expert real estate agent today. The advantages of homeownership far outweigh the costs, and leaning on the advice of experts can help you become the rookie homeowner of the year.

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Homeownership comes with many perks, one of the biggest being the mortgage interest tax deduction. According to the U.S. Treasury’s Office of Tax Analysis, this tax break resulted in a decrease of $25.1 billion in tax payments in fiscal year 2019. Loan interest has been deductible since as far back as 1913, so the tax break has been around for more than a century — but confusion can still arise over who’s eligible and whether the deduction is worth taking.

We sifted through the most recent IRS guidance as of 2021 and gathered insights from seasoned tax professionals to get the lowdown on 7 key things every homeowner should know about the mortgage interest tax deduction.

1. Mortgage interest adds up faster than you might think.

You may find the mortgage interest deduction to be your most valuable tax break as a homeowner — here’s why.

When you get a loan to buy a house, part of your monthly mortgage payment goes toward interest on that loan, and the rest will go toward the principal balance. The amount of interest paid each month will depend on the amount of your mortgage and the interest rate on your loan.

To illustrate, here’s an example of a hypothetical amortization table that breaks down how much goes toward the actual loan amount and how much goes to interest, based on a $315,000 mortgage with a 30-year term and a 3.25% fixed interest rate over one year*:

*This example loan amortization schedule was created using Microsoft Office’s loan amortization tool. It is shown for educational purposes only and should not be construed as tax or legal advice. It is also not intended to illustrate available APRs or mortgage-related marketing under the Truth-in-Lending Act Section 1026.24.

In the above example, you would end up paying a total of $10,144.12 in interest payments over the course of the year — an average of $845 every month. That’s not chump change, especially when you’re juggling all of the other expenses associated with owning a home.

With the home interest mortgage deduction (HIMD), homeowners have the opportunity to deduct the amount of mortgage interest paid throughout the year from their taxable income, which in turn reduces the amount of tax they will owe. In the above example, if the homeowner’s annual earnings were $85,000, they could deduct the $10,144 paid in mortgage interest, so they would only owe taxes on $74,856 of their income.

Your lending servicer will provide you with a copy of Tax Form 1098 — “Mortgage Interest Statement” — detailing how much you’ve paid in mortgage interest in the relevant tax year. If they don’t send you a paper version, you may be able to download a copy online through your online mortgage portal. You’ll either use this form in the process of computing your taxes owed yourself or send a copy to your tax professional for review.

2. To take advantage of the home mortgage tax deduction, you’ll need to itemize.

When you file your taxes, you have the choice to use the standard deduction or to itemize your deductions. Here’s a review of each route:

• Standard deduction: Every taxpayer is permitted to deduct a certain dollar amount from their income before the income tax is calculated. This reduces the amount owed to the federal government. (Click here to calculate your standard deduction as of 2020.)
• Itemized deductions: If you choose to itemize your deductions, you will claim individual expenses that will be subtracted from your taxable income instead of taking the flat standard deduction. Itemized deductions can include medical expenses, real estate taxes, state and local income taxes, charitable contributions, and home mortgage interest. If you want to deduct your mortgage interest, you’ll have to itemize.

Most taxpayers (or their accountants) will run the numbers for both standard and itemized deductions and choose the option that results in the least amount of taxable income. In the example above, if your mortgage interest is right around $10,000 and your standard deduction is $12,400 if single or $24,800 if married, it might make more sense to not itemize, and thus forgo the mortgage interest deduction.

But if you also have other deductions to make, such as for charity donations or using your home for business purposes, it could push the total amount over the standard deduction, which means it would benefit you to itemize.

3. How much you can deduct will depend on when you purchased your home.

You may be able to deduct 100% of your mortgage interest paid in the previous year, or only a portion of it, depending on the size of your mortgage and when you acquired the debt due to the way tax rules have changed. As a mortgage holder, you have one of two types of mortgage debt in the eyes of the IRS:

• Grandfathered debt: According to the IRS, any mortgage or refinance that was taken out before Oct. 13, 1987 is considered “grandfathered debt,” because the loans were taken out before today’s mortgage interest tax regulations were created. Mortgage interest on grandfathered debt is fully tax-deductible.
• Home acquisition debt: If you took out a mortgage or refinance after Oct. 13, 1987 and before Dec. 16, 2017, you can deduct interest on up to $1 million of mortgage debt, or up to $500,000 of mortgage debt if single or married filing separately. If you took out a mortgage or refinance after Dec. 15, 2017 you can only deduct mortgage interest on up to the first $750,000 of mortgage debt, or up to $375,000 if single or married filing separately.

What’s with that December 2017 modification? Well, the cap on the amount of interest you can deduct is a reflection of changes made by the Tax Cuts and Jobs Act (TCJA), which was the piece of legislation that lowered the maximum loan balance to $750,000.

It’s been reported that in 2018, after the TCJA took effect, less than half as many U.S. homeowners wrote off their mortgage interest.

Keep in mind, though, that even if you purchased a home as recently as last year and your loan is higher than the cap, you can deduct the interest paid on the first $750,000 of debt per current tax code.

Another important note: The TCJA also excluded home equity loans from interest deductions unless the loan is used to fund home improvements that boost the property’s value, and many itemized deductions were removed or limited.

4. You can also deduct mortgage points on a purchase or refi.

When you bought your home, you may have paid mortgage points. Paying mortgage points is essentially like paying for interest in advance, which lowers your interest rate for the duration of the loan. Typically, one point costs 1% of your mortgage amount, so if you paid three points on a $300,000 loan, you would have paid $9,000. A portion of that $9,000 can then likely be deducted in full the year that you pay them so long as you meet IRS requirements.

If you refinanced your home to take advantage of record-low interest rates and you paid home mortgage points when you refinanced, the rules change. You’ll likely need to deduct those points paid to refinance over the life of the new mortgage rather than all at once — though there are exceptions for homeowners who’ve used their refinanced mortgage proceeds to improve their existing home, the IRS notes.

5. Used a home equity loan to make improvements? Check to see if you can deduct that, too!

Got a home equity loan or line of credit? Chances are you can deduct the interest you pay on those accounts, but “only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” per the IRS.

That means if you used the funds to renovate your kitchen, build an addition, or finish the basement, the interest is deductible — but if you used the money to pay off credit card debt, cover medical bills, or make a repair that doesn’t boost the home’s value, you won’t be eligible for the deduction.

6. Got a houseboat? No problem — you don’t need a traditional single-family home to qualify.

The IRS offers a broad definition for what types of homes qualify for the mortgage interest deduction. The rule isn’t limited to a single-family home — it can be any dwelling on which you hold a mortgage and has “sleeping, cooking, and toilet facilities.” That means a condo, mobile home, house trailer, or even a houseboat will qualify.

What about a second home? As long as you don’t rent it out, that also counts as a qualified home and all mortgage interest is deductible, even if you don’t live there at all. If you own a second home but rent it out for part of the year, the IRS requires you to live there for more than 14 days OR more than 10% of the number of days it is rented, whichever is longer. Otherwise, the home is considered a dedicated rental property and the interest can’t be deducted.

If you own more than one second home, you’ll have to choose one of them as the qualified second home. However, you can choose a different second home each tax year.

7. Is it worth it to itemize and deduct mortgage interest? Talk to a tax pro.

Given the changes that took effect with the Tax Cuts and Jobs Act, you may be wondering whether it makes more financial sense to take the higher standard deduction instead of itemizing — and thus forgo the home mortgage interest deduction. If you’re not sure, it’s best to ask your tax professional to run the numbers so you can compare the scenarios and choose the one that’s most beneficial.

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Emergencies that damage property are among the most stressful events a person will experience in their life. During these fraught times, the last thing you want to do is worry about filing an insurance claim, but properly filing a claim is essential for guaranteeing adequate coverage.

The good news, though, is that some of the most common reasons a claim is denied are entirely avoidable. These top homeowner mistakes include not filing a claim in time, failing to pay premiums, insufficient documentation of the damage, and not understanding coverage. We spoke to leading experts to get you these five steps to make the process a little easier.

Prepare before disaster strikes

If you have a mortgage, your lender probably requires you to have home insurance. This policy protects the structures on your property and your personal belongings in the event of damage or theft. However, simply having an insurance policy doesn’t guarantee full coverage. You need to select the best policy for your needs and take proactive steps to ensure you get the most money possible when you file a claim.

Take a home inventory

The documentation process should begin before you need to file a home insurance claim. According to the Insurance Information Institute, just over 40% of polled policyholders proactively inventoried their belongings. And for a good reason: When policyholders file a claim, an inventory of assets is one of the most common documents they submit to insurance adjusters. Homeowners can use a detailed inventory as a checklist to quickly note damaged, lost, or stolen property, streamlining a task that can feel overwhelming under a home emergency stress. When creating a home inventory, document the name, brand, and date purchased for big-ticket items. If you’re able, include receipts as proof of purchase, too.

Choose the best policy for your needs

Your home inventory can also help you purchase the right coverage when shopping for policies. Miranda Day, a licensed producer at top-rated Secord Insurance Agency in Seattle, Washington, notes that most “policies include limits on certain items such as jewelry, guns, art, collectibles, rugs, etcetera.” If you own valuables in these categories, consider supplementing your home insurance with a “floater policy.” While more expensive than most home insurance policies, floater policies offer more comprehensive coverage for high value items.

Remember to read the fine print

Although the name might suggest it, home insurance doesn’t cover all emergencies on your property. For example, if your home was flooded or sustained wind damage from a named storm, your home insurance policy probably doesn’t cover it. And if it does, your deductible is likely sky-high. Catastrophes deemed “acts of god” — like tornadoes, hurricanes, and earthquakes — are excluded from most home insurance policies, so you’ll need to purchase natural disaster or catastrophe insurance if your home is at risk.

If a natural disaster damages your home, reach out to the representative from your catastrophe insurance to initiate the claims process and ensure you get the best coverage.

Step 1: Attend to the emergency immediately

When disaster strikes, the most important thing to do is to protect yourself and your family. If, however, you’re able to mitigate or tend to the emergency to prevent further property damage, do so. Most home insurance policies have contingencies that require the policyholder to do what is practical and reasonable to secure and protect damaged property.

For example, if a pipe bursts and floods your home, the policyholder would be responsible for turning off the water as soon as possible, airing out the affected rooms, and removing any personal property from harm’s way. If your insurance adjuster finds that significant damage incurred after the event, you may be liable for the cost.

Step 2: Document the damage with photos and written notes

Organization is key to handling an insurance claim. If you clearly document the damage to your home and the steps you’ve taken to restore it, you’ll increase the likelihood of your insurance approving the claim.

Take pictures

Once it’s safe to enter your home and you’ve secured your property against further harm, take pictures of any damage — no matter how significant. An easy way to do this is to use your smartphone to record a walkthrough while narrating the damage.

You can then rewatch the footage in a comfortable location and annotate your home inventory by highlighting the damaged items, the type of damage they suffered, and anything else of note. Even if you didn’t already have a home inventory, you can use the footage to start one. Submit the video, photos, and annotated inventory when you file your claim.

Write down everything you do after an emergency

It can be hard to remember the contents of our days during the best of times, and this is especially true in emergencies. It’s important to document the steps you’ve taken to file a claim to prove your due diligence in case you ever need to contest the claim. Create a digital or physical organization system to keep track of everything claim related, including:

• Annotated home inventory
• Photos or videos of the damage
• Receipts of any emergency repair work
• Receipts for additional living expenses (for example, meals out if your kitchen was destroyed — you may be able to be reimbursed for these costs!)
• Dates, times, and names of the people you’ve contacted at the insurance agency and notes on your conversation
• Dates, times, and names of contractors you’ve contacted and notes on your conversation
• Copies any claim related document

Step 3: Review your insurance policy to reach out to the appropriate representative

Once you’ve documented the damage to your home, review your coverage. It’s useful to refresh your memory on the details of your coverage before taking next steps so that you’re informed on everything you’re entitled to before speaking to a representative.

Reach out to your agent immediately

Your insurance agent will be your greatest ally in filing a claim, so immediately reaching out to them is a vital step. Mary Stewart, a top selling agent in Sugar Land, Texas, with over 40 years of experience, says it’s crucial to work with an experienced insurance agent. She shares a story from her own experience:

“When I bought my first house in Galveston, I chose an insurance agent down there in Galveston because I knew that he would be able to tell me what type of policy, how much content I should take, and how much deductible I should do. And so because of that, after the hurricane, they paid very nicely.”

Most policies also have strict windows for when homeowners need to file a claim after an emergency. According to Adjusters International, one of the most common reasons a claim is denied is because a policyholder didn’t file the claim on time. Don’t lose your payout by missing a deadline, and contact your agent as soon as possible to initiate the claims process. Your agent will be able to provide you with the next steps on how to contact your insurance company to begin the claims process.

Day also says, “any small claims should always be presented to your insurance agent before calling the insurance company. Depending on the cost to repair the damage and the deductible on your policy, we may recommend not filing the claim because the out of pocket cost is less than the insurance rates increase the insured will see over the next five years.”

While it’s not always possible, try to work with the same agent throughout your claims process. This will not only make it easier for you to keep track of correspondence, but it can lead to more efficient processing on your insurance company’s end too. By centralizing communications with one person, you can put a face to your case and ensure that none of the details get lost in the metaphorical or literal shuffle.

Step 4: Reach out to contractors in your insurer’s network

Many insurance companies have networks of pre-approved contractors who are their preferred providers for repairs and remodels after a home emergency. Ask your insurance agent for a list of guaranteed network providers to begin your rebuilding phase. This list will give you a head start on your rebuilding phase, and give you the added benefit of working with vetted and verified contractors. Some insurance providers even guarantee work completed by their approved providers for years after the work is complete, giving you an extra warranty.

Even if you’re planning on doing the repairs yourself, get written estimates from two to three pre-approved contractors for an accurate breakdown of the costs of materials and work. Not all policies permit a homeowner or policyholder to complete the repairs themself, either. Get confirmation from your insurance provider this is allowed before moving forward with any DIY restorations.

If your insurance doesn’t have a network of contractors, do your research before hiring one. Here are the top things to look out for:

• Verify their license and insurance.
• Get a written estimate.
• Receive written approval from your insurance.
• Get written confirmation from your contractor that they will wait for payment after you receive your insurance payout.

Step 5: Fight for coverage if the damage falls into a gray area

Stewart reflects on a time a close friend had to fight for coverage: “The flood [adjustors] came in and said, ‘No, this is a windstorm problem. This was not caused from a flood [and therefore was not covered]. So, they wouldn’t pay it. She had to hire an attorney to go after them and prove that it was, in fact, a flood.” While this may sound like a nightmare scenario, Steward says, “You can’t avoid it. It’s gonna happen. You just have to be prepared for it.”

Review your original claim

Before taking the next steps in filing a complaint, review your original claim to verify that you’ve included all the details and proof necessary. If you filed it while under extreme stress, you may have left out some vital information. Do you have additional documentation, photos, receipts, or proof of damage to add to your claim? If you do, ask your insurance company if you can add these to your existing claim.

Conduct your own appraisal

If you’re still unable to agree with your insurance provider, consider hiring a public insurance adjuster. These independent appraisers evaluate property loss on behalf of a policyholder, so you can use their estimates as leverage for more coverage. You will have to pay for their services out of pocket, but their appraisal could be the difference between getting the settlement you deserve or not. Just as you did with your insurance and real estate agents, though, vet your adjuster and verify their license before inviting them to evaluate your property.

Hire an attorney

Once you’re sure that you want to proceed with a formal complaint, hire an attorney to litigate and file your complaint with the state. Although insurance claim disputes escalating to this stage are rare and not guaranteed to work, it may be your only option if you feel like you have been wrongfully denied or underpaid.

Review your coverage annually

You never know when the unthinkable might happen. While home insurance might seem like just another monthly bill most of the time, the protection it offers in the case of an emergency is essential for homeowners.

Not all policies are equal, though, and your coverage needs may change from year to year. Remember that it’s your responsibility as a homeowner to choose the best home insurance policy and supplementary coverage for your location. Don’t get caught off guard by your insurance after an emergency, and set a date every year to review your coverage with a trusted local agent. Day says it’s never just about a policy; it’s about “[putting] the customer’s best interest first.”

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“I can’t pay for this house anymore! Lender, will you take it back?”

If only handing your house back to the bank, a process formally known as a deed in lieu of foreclosure, was that easy.

In reality, it usually goes something like this: You tried to do a short sale — but it failed. As a last resort, you ask if you can convey the title of the home to the bank.

If you’re lucky, in exchange for ownership of the property, the lender agrees not to foreclose. In addition, the lender cancels the loan and clears you of any remaining debt owed on the mortgage.

However, a deed-in-lieu will hurt your credit and it is not a magic bullet solution. So what does this route entail and should you pursue it?

We’ve dug into recent government guidance for details and spoke to Glen Henderson, a top San Diego real estate agent with almost two decades of experience working with financially distressed homeowners.

Armed with the facts, we’re here to answer your top questions about the colloquial “hand-back” strategy and give you the unvarnished truth about its advantages and drawbacks.

Can the bank rightfully take your house?

A lender has the right to seize your home through foreclosure when you stop making payments.

During foreclosure, a lender takes over the property, evicts the owner, sells the home at auction, and then collects as much of the balance of the original loan as possible.

If the sale price doesn’t cover the mortgage debt, the lender may be able to go after the difference in funds through what’s called a deficiency judgment (more on that later).

According to top-three credit bureau, Experian, a foreclosure is one of the most catastrophic events that can appear on your credit report and will in turn limit your ability to qualify for new credit or loans for several years.

Foreclosures appear on your credit report for seven years from the date of the first missed payment that led to the foreclosure. Once the seven years are up, the foreclosure should fall off your report.

To help homeowners avoid foreclosure, the government provides an entire portal of resources. Your lender may also offer a help center, so check your mortgage statement and your online account for guidance.

When does foreclosure begin?

Individual states and mortgage companies have different rules and guidelines for when foreclosure begins. According to HUD (the Department of Housing and Urban Development), it’s usually three to six months after your first missed mortgage payment.

Keep in mind: Lenders hate foreclosures! They don’t want to go through with it if they can help it. According to the U.S. Congress Joint Economic Committee, a lender will lose 12%-19% of a home’s value and spend about $50,000 on foreclosure proceedings if they have to foreclose.

“Letting the property go into a foreclosure means the property will probably sit empty for an extended amount of time,” says Henderson. “In my opinion, the only entity that benefits from a foreclosure is the real estate investor that gets to buy the property from the bank after 12-24 months of it sitting empty and deteriorating.”

When faced with the risk of foreclosing, Henderson urges homeowners to be proactive:

“Contact the lender immediately,” he says.  Henderson believes that the sooner you can begin explaining your situation and working with the lender on various options,the better the chances the lender will take the time to analyze all the factors in your specific situation and work with you to find alternatives to foreclosure.

What happens if I surrender my house to the bank voluntarily?

When you’re desperate to be free of mortgage debt that you can’t afford, you may be eager to let the bank claim the title to your home so you can walk away from a messy financial situation fast. But before you can wave the white flag, you’ll need to exhaust your other options.

These include:

Open market sale

After about three months of missed mortgage payments, you’ll likely receive a Demand or Notice to Accelerate letter, informing you of how much you owe and providing 30 days notice to get your balance current. From there, it can be two to three months to the scheduled sale of your property if you take no action to square up with the mortgage company, HUD’s guidelines note.

That gives you a little wiggle room to see the writing on the wall and get this house sold before foreclosure takes place.

Even if your mortgage company has initiated the foreclosure process, you can still sell your home independently prior to your scheduled auction date.

A recent report from CoreLogic shows that U.S. homeowners gained 10.8% in equity from 2019 to 2020, making it possible your home has increased in value substantially in the past year alone to help cover your debts.

The trick is that you also need to make sure that the value of your home will cover all the regular selling fees (which can amount to 9%-10% of the sale price) plus any lawyer charges and late fees you owe for missing payments.

“Sometimes an agent will only take into account the loan balance on the property, and assume it will be simple to recoup the past-due amount after a sale. But they don’t consider the late fees and attorney fees that get added to the balance on a defaulted mortgage,” Henderson says.

At HomeLight, we’re here to help you find an agent in your market who’s comfortable dealing with lenders and attorneys, and who can help you navigate the nuances of your situation. In fact, some agents have earned special designations for handling short sales, foreclosures, and distressed sales. We’re happy to elevate these agents to the top of your search so you can get the help you need in record time.

Loan modification

With a loan modification, you work with your lender to change the terms of your mortgage when you’re struggling to afford payments. The lender may agree to lower the payment amount, lengthen the term of the mortgage, or lower the interest rate to reduce your risk of default. To qualify for a loan modification, you’ll need to formally apply and be able to show proof of hardship.

Due to circumstances surrounding the coronavirus pandemic, the government has offered additional mortgage relief options through the CARES Act, including forbearance plans.

Forbearance plans do not wipe out your mortgage debt but allow you to pause or reduce mortgage payments for a limited time period and repay what you owe at a later date.

However, as an additional form of relief, the Consumer Financial Protection Bureau has stipulated that mortgage servicers who offered forbearance plans under the CARES Act cannot require borrowers to pay back what’s owed in a lump sum.

Outside of the CARES Act and pandemic-related relief options, however, you should temper your expectations that your loan modification request will be approved. “They are very difficult to obtain,” says Henderson. ”In my experience, most of the (pre-pandemic) loan modification requests resulted in a denial.”

Short sale

A short sale is when your lender agrees to let you sell your home for less than you owe on your mortgage. Lenders will usually prefer a short sale over a deed-in-lieu of foreclosure.

“The lender is going to recommend you try to do a short sale first. If that has failed, they will allow a review of a deed-in-lieu of foreclosure,” Henderson says.

With a short sale, the lender receives the funds from the sale of the property. With a deed-in-lieu, they get ownership of the property, but they also have to take on the hassles and logistics of selling it.

See how that’s more work for them?

These types of sales are referred to as “short” because the lender agrees to cancel your mortgage debt even if the funds “fall short” of the principal loan balance. However, don’t expect a “short” speed of closing.

A short sale will take 4 months to 5 months (sometimes much longer) to close, and you’re obligated to keep up with your mortgage obligations until the transaction closes. A short sale can also lower your credit score by 100 points or more.

How do I start the deed-in-lieu of foreclosure process?

A deed-in-lieu of foreclosure is usually going to be a last resort for the lender to avoid foreclosure, and generally only an option to you after a short sale has failed.

As far as kicking off the process, every lender has their own requirements, and customs can also vary by state. But generally, the steps to executing a deed in lieu of foreclosure include:

1. Call your mortgage lender to discuss all of your alternatives. Explain your situation and ask to begin the deed-in-lieu process.
2. Fill out the application and collect the documentation that shows you’re unable to make payments.
3. Respond to all requests for additional details and wait at least 30 days or more before you hear a final decision.
4. If approved (which is not a guarantee) get advice from a local real estate attorney. You will have to pay for their time, but you need to make sure you understand all the clauses in the agreement.
5. When it’s time to move out, you should leave the property in good condition. Try to leave it as close to being ready to go on the market as possible.

Can I give my house back to the bank without penalty?

Unfortunately you can’t give the title of your house to the bank and expect to emerge with a clean slate as if nothing happened. Here are a few key outcomes to be aware of with a deed in lieu:

Credit impact

Like a short sale, a deed-in-lieu of foreclosure can cause your credit score to drop 100 points or more. The truth is the credit score impact with either of these non-foreclosure routes are about the same as you’ll see after a foreclosure.

On the plus side, however, a deed in lieu could reduce the time period where you won’t be likely to qualify for another loan, so to speak. You will likely be able to qualify for a new mortgage after two years as opposed to the seven-year waiting period required after a foreclosure.

Avoidance of deficiency judgment

The main benefit of a deed in lieu vs. a foreclosure is typically the avoidance of a deficiency judgment. With a foreclosure, in many states a lender can use a “deficiency judgement” granted by a court to go after you for the balance due after they take your house.

For example, if the total debt owed on your house is $200,000, but the home sells for $180,000 at the foreclosure sale, the deficiency is $20,000. You could be on the hook for that amount by garnishing your wages or levying your bank accounts.

This is possible because most states allow lenders to issue what are called recourse loans, or loans that enable a lender’s ability to get a deficiency judgment if the borrower defaults.

As of this writing, there are only 12 “non-recourse” states that don’t allow lenders to pursue additional funds through deficiency judgement. Those states are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.

By contrast, a deed in lieu of foreclosure — similar to a short sale — is often set up to satisfy the outstanding mortgage debt by way of giving up your title to the home even if you have a recourse loan.

Tax implications

Keep in mind that with either a deed in lieu or short sale, the debt that the lender forgives could be considered taxable income. Your lender will report the debt forgiveness using Form 1099-C. Talk to a trusted tax professional to find out what you could be liable for.

Act fast to avoid a deed-in-lieu

Life throws curveballs sometimes which can threaten your stability as a homeowner. One recent study found that 25% of Americans have no emergency savings and that one-third report lower income since the start of the pandemic. The loss of a job or realization that you took on more house than you can afford can lead to unexpected trouble paying your mortgage.

However, as HUD encourages homeowners to realize: “Foreclosure doesn’t happen overnight.” Denial of the problem will only force you into last resort options like a short sale, deed in lieu or foreclosure, or foreclosure. Sooner than later, connect with a HUD-approved housing counselor. If you can salvage your credit history by selling before foreclosure, by all means partner with a local agent to list now. Your bank (or lender) would rather not take a hand-back, and you’d be better off avoiding it!

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A massive transition to remote work in the U.S. has elevated intrigue around the home office tax deduction. Many people are wondering if their new pandemic WFH setups make them qualified for certain write-offs. However, most of the folks who packed up their desk plants and bobbleheads back in March won’t be able to claim the deduction — unless they are or have become self-employed.

In addition, the home office deduction is somewhat of an “honor system” write-off and one you’ll want to have good records for in the event of an audit. That said, if you qualify under current tax code, you should by all means claim it if doing so makes financial sense. Here are what some seasoned CPAs say are the main points of confusion about this popular deduction and what you should know.

1. Company employees need not apply.

Prior to the sweeping tax reform passed in 2017, W2 or “paycheck” employees were able to take the home office deduction to some extent if they used the space for their company’s convenience and claimed the deduction as an unreimbursed job expense. However, the Tax Cuts and Jobs Act (TCJA), which went into effect Jan. 1, 2018, suspended the home office deduction for employees at least through 2025.

As of this writing, the home office deduction is limited to what the IRS calls “self-employed taxpayers, independent contractors, and those working in the gig economy.” It’s aimed at people, say, running a small consulting business out of their home or freelancers who plant themselves in the same chair every day for their writing business. The fact that you’re telecommuting alone doesn’t qualify you for the deduction. You also must be self-employed.

If you find that you’re spending a good chunk of your own money on items you need to work from home, it couldn’t hurt to ask your employer about reimbursement.

2. Make sure your business meets the ‘PEP’ requirements.

If you’re self-employed or run a home-based business, there are three more conditions that must be met in order to cash in on the home office deduction, per the IRS.

Deltrease Hart-Anderson, EA, who has provided income tax services for small businesses in South Carolina for more than 20 years, calls it the “PEP” rule (Principal place of business, Exclusive use, and Profits).

Hart-Anderson helps us break it down:

Principal place of business

This rule requires you to prove that your home serves as your principal place of business. That might mean holding meetings with clients or customers (in person or virtually), doing computer work, answering emails, taking phone calls, creating and shipping products, or any other activities required to do your job. That’s not to say you can’t duck out every now and then to work at Starbucks, but the IRS is looking for substantial and regular use.

“The business space you deduct must be used strictly for business purposes, and it usually will not work if you are renting an office elsewhere,” says Gail Rosen, CPA, PC, who runs a boutique CPA firm that has been providing tax services for individuals and small business owners in New Jersey for over 35 years. “The home office cannot be for your convenience.”

Exclusive use

The second condition is that you must use your designated home workspace solely to perform your business duties. If you’ve converted a spare bedroom, dining room, garage, or even just a corner of a room into a place to work, you can generally take the home office deduction.

“Exclusivity is key,”” explains Hart-Anderson. “This space can’t double as your kids’ play space when you’re not doing business. Regular can mean essential and frequent. If you sporadically use your office in your home, then this is not a deduction for you.”

Profitable (or Profit-Seeking)

To qualify for the home office tax deduction, you must have a business that is profitable in the year for which you’re filing. If your business doesn’t qualify due to lack of profit in one year, you can carry over the deduction to the next year. “Hobbies are not profit-seeking endeavors and do not qualify for office use in home tax deductions,” says Hart-Anderson.

3. Pick a route: actual expenses or simplified method.

The IRS gives you two options for calculating the home office tax deduction: using your actual expenses or the “simplified method.”

Actual expenses

This method is based on your actual expenses associated with working from home, and is the more complicated method of the two. Hart-Anderson breaks it down for us:

Step 1:
Determine the square footage of the portion of the home you’re using for business, then divide that number by the total square footage of the entire home. This becomes your usage percentage. For example, if your home office is 300 square feet and your total home is 2,500 square feet, then your usage percentage is 12% (300 divided by 2,500).

Step 2:
Next, you’ll determine your actual home expenses, based on what is used directly for business and what is used for both business and personal purposes. If an expense is used 100% for business — such as a new desk for your office — then you’ll deduct 100% for the business. If an expense is used both for business and personally—such as a housekeeping service that also cleans other rooms— then you can only deduct 12% of that expense for business. The same goes for expenses that apply to the entire house. For example, if your mortgage interest is $15,000, then you will have a business deduction of $1,800 ($15,000 x 12%).

Simplified method

Keeping track of your home office expenses can be tedious and requires a lot of recordkeeping. So some taxpayers may instead opt for the simplified method. With the simplified method, you can deduct up to 300 square feet at $5 per square foot of space used in your home office, for a maximum home office deduction of $1,500.

Hart-Anderson offers an example: If you have a 200-square-foot home office, then your deduction would be $1,000 (200 x $5). If you have a 300-square-foot home office, then your deduction would be $1,500 (300 x $5). However if you have a 600-square-foot home office, then your deduction under this method would still be $1,500, the maximum allowed by law.

Your accountant or tax professional can help you crunch the numbers to determine which option will let you recoup the biggest deduction.

4. Understand which expenses qualify — and which ones won’t.

If you’ve decided to use the simplified method and take the $5 per square foot of office space, the process is simpler. You won’t need to worry about combing through all of your expenses and figuring out which ones are deductible, and will just deduct a single, flat amount. But if you think the actual expenses method will get you a bigger tax break, you’ll have to itemize your individual work-related expenses.

When figuring out your actual expenses, there will be two categories that are deductible: direct and indirect.

Direct expenses

These are expenses that are only for the part of the home where you work, and are 100% deductible. Some examples of direct expenses include:

• Painting your home office
• Repairing a water leak in the ceiling of the office
• Home office furniture, monitor, printer, etc.

Indirect expenses

These expenses are those that partly apply to your home office, but also apply to the remainder of the home. You can deduct these, but only at the percentage of the home taken up by your office or workspace. Some examples of indirect expenses include:

• Repairing your furnace or air conditioner (which impacts the whole house and not just your office)
• Real estate property taxes (note: If you’re also itemizing deductions on Schedule A, you can only deduct this once)
• Mortgage interest (note: If you’re also itemizing deductions on Schedule A, you can only deduct this once)
• Homeowner’s insurance
• Internet access
• Utilities (gas and electric, trash collection, water, cleaning services, a dedicated business phone line)
• Security system
• Depreciation (allowance for the wear and tear put on your home office)

What’s not covered?

Any expense related to an area of the home outside of the office isn’t deductible. For instance, you won’t be able to write off any portion of your master bath remodel, lawn care services, new patio, or kitchen repair.

Also, if you only worked in your home office for part of the year, you can only deduct your expenses for that time period. So if you didn’t start your business until June, you’ll only be able to deduct expenses for seven months of the year.

5. Know the exceptions for daycare facilities.

If you use your home to provide childcare services or to care for an adult over 65 years of age, you may be able to claim a deduction on the part of your home used to provide that service. The catch is the IRS requires you to have a “license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.”

Unlike a traditional home office, it’s likely that the areas of the home where you provide daycare services are also used by other people, both during and after your working hours. For that reason, you can only deduct your expenses for the amount of time that those spaces are used solely for your business.

6. Hang onto your receipts.

If you’re using the actual expenses method and itemizing your individual expenses, it’s a good practice to keep all of your receipts in case you’re ever audited by the IRS. “As with all business deductions, I recommend keeping all receipts for at least seven years,” says Hart-Anderson.

7. Use the correct forms.

If you’re self-employed or a business owner who qualifies for the home office deduction, don’t miss the chance to cash in on the tax savings.

If you’ve opted to use the simplified method, you’ll take the flat-rate deduction on Schedule C (Form 1040), which reports profit or loss from a business. Click here to download the most recent version of the form.

If it’s worth the extra time and hassle to itemize your actual expenses, you’ll need to submit Form 8829 to calculate the total deduction, and then report that amount when you file your Schedule C.

Header Image Source: (Gian Paolo Aliatis / Unsplash)

In October 2001, a member of the Armed Forces named Brian bought a home. A few years later in April 2004, Brian and his family were deployed out of state. He kept ownership of his home throughout his military career but never moved back.

Fast-forward 12 years to November 2016: Brian sold the home, resulting in a capital gain of about $21,000. He filed his own federal income taxes through a DIY program and paid the taxes he believed he owed on that gain.

A couple of years later, Jeremy Kniffen, a practicing CPA in Colorado for more than 20 years, took on Brian as a client. Kniffen asked if Brian had heard of the capital gains tax exemption for military members. Brian said no — but would Kniffen help him amend his tax return? Kniffer agreed and, using the military exemption, Brian received a refund of approximately $3,800.

That was just one of dozens of instances when Kniffen has helped his clients use the “stop the clock” exemption, a little-known tax rule which makes it easier for members of the military to keep their home sale taxes to a minimum. So just what is this tax rule and how do you know if you qualify? We spoke with several CPAs for guidance — read on to hear what they said!

How are capital gains normally taxed?

Anytime someone sells a capital asset — such as a car, stocks, or a house — for more than the adjusted basis (the cost paid for it minus any capital improvements made), the IRS will assess a capital gains tax of anywhere from 0%, 15%, or 20% depending on the person’s income.

Here’s an example:

You bought your home in the year 2001 for: $300,000

You sold it in 2021 for: $540,000 (marking 4% yearly appreciation)

Before selling, you invested in the following improvements:

• Kitchen renovation ($40,000)
• New roof ($20,000)
• New deck and paver patio ($25,000)

Your settlement costs amounted to:

• $25,200 in agent commissions
• $15,000 in other closing fees

From here, you can calculate your capital gain like so:

$499,800 (sale price – settlement costs)

–

$385,000 (cost basis, i.e.,  the original price + the total cost of capital improvements)

=

A capital gain amounting to $114,800*

If you’re taxed at the 15% range, Uncle Sam would take a hefty $17,000 of that profit amount — but luckily, most homeowners won’t have to fork that over, thanks to the capital gains tax exclusion.

What’s the capital gains tax exclusion?

According to the current tax code, when any homeowner (even non-military) sells a house, they don’t have to pay capital gains taxes as long as their profit doesn’t exceed $250,000 for single filers or $500,000 for married-filing-jointly.

So in the example above, the $114,800 capital gain is far less than the cap, which means you wouldn’t have to share any of your profits with the IRS.

There is, however, a catch. To qualify for the exclusion, the homeowner must meet these three criteria:

• They must have lived in the house for at least two of the previous five years.
• They must have owned the house for at least two years.
• They can only claim the exemption once every two years.

What’s the military tax exemption?

When someone is serving in the military and receives a Permanent Change of Station (PCS) that forces them to move out of their primary residence for a long period of time, it may be impossible to qualify for the general capital gains tax. In Brian’s case, he was living away from his house for 12 years, so he wouldn’t have met the standard “use test” that required him to live there for at least two of the past five years.

That’s where the “stop the clock” exclusion comes in. According to the current tax code, if a homeowner or their spouse is a member of the U.S. military or the intelligence community and their service requires them to live outside their home indefinitely or for longer than 90 days, they are allowed 10 additional “suspension” years on top of the five “test” years that everyone else gets.

So instead of having to live in the house for at least two of the past five years, they would only have to live there for two of the past 15 years to avoid paying a capital gains tax when they sell.

Back to Brian: Did he meet the test using the military exemption? Yes — here’s how.

Remember, Brian sold his house in November 2016. The military-specific suspension period of 10 years, in this case, extends back to November 2006. On top of that, the test period extends back an additional 5 years, to November 2001.

To meet the ownership and use tests, Brain would need to have owned and lived in the house for two years between November 2001 and November 2016. And he did!

Between November 2001 through April 2004, he had 2.5 years of owning and living in the house within the suspension and test period of 15 years. So, he qualifies for both the use and ownership tests and doesn’t have to pay capital gains on the sale up to the government thresholds.

Why not just sell the home?

According to the USAA, which offers insurance and financial products and services to U.S. military families, one in five of its members move each year. For many of those homeowners, especially the ones who need to vacate quickly, it’s often quicker and easier to rent out their homes than to list and sell them.

Choosing to become a “military landlord” also provides a host of other benefits:

• You’ll be able to move back into the house after deployment is over.
• You’ll have the opportunity to build equity in the home while the renter pays down the mortgage (and could even earn monthly revenue, although that part could be taxable as rental income).
• There is the opportunity to receive tax write-offs for the rental property, including for mortgage interest, property taxes, maintenance, improvements, and repairs.
• If you have a personal attachment to the house and want to keep it in the family without living there, taking on a tenant can cover the mortgage in your absence.

Who qualifies for the military gains tax exemption?

The IRS is pretty specific about who is eligible for the extra 10-year suspension. To qualify, the service member must be performing “qualified extended duty,” which means they have been “called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days.”

They must also be serving at a duty station at least 50 miles from their main home, or “living in government quarters under government orders.” That means if the homeowner moves back within 50 miles of their home, or if they are no longer on active duty, they are no longer eligible for the exemption.

Wondering if your (or your spouse’s) military role is eligible for the exemption? Consult the IRS’s complete list of who qualifies.

The fine print: More details you should know about the exemption

Beyond the basic 10-year suspension allowance, there are a few more important details and rules you should know about the “stop the clock” clause.

• Service records may be required: Bret Scholl, CPA, CGMA, has been operating his own accounting practice in California since 1985. Scholl has worked with around a dozen stop-the-clock exceptions over the years, most of which have been for multiple foreign deployments for military and government service clients. Scholl recommends keeping sufficient service records in case you need to prove to the IRS that you qualify for the exemption.
• One at a time: If you own two properties while deployed, you can’t apply the “stop the clock” exemption to both of them. The exemption can be used sequentially — i.e., if you apply it to the sale of one home, then buy another home, and then are deployed again —  but not simultaneously.
• The “recently left” rule: There is a somewhat vague clause in the exemption that states “this extension of time can apply to taxpayers who have recently left the military.” It doesn’t clarify what timeframe would qualify as “recently,” so be sure to ask your tax professional if you’re uncertain about your eligibility.
• Rental income taxes: Tim Yoder, a certified CPA with over 25 years of accounting experience and a tax analyst at FitSmallBusiness, points out another thing to keep in mind: “If you collect rent from the house during the five-year period (plus up to 10 years while on qualified official extended duty), you will need to pay income tax on any profit,” he says. “When you sell the house, you must recognize capital gain up to the amount of depreciation you were allowed to deduct against rental income. This is still a great deal, because any appreciation of the house that occurred during the five- to 15-year period is excluded up to $250,000 ($500,000 per couple).”

Selling any home involves some hiccups along the way, but selling an unoccupied property while you’re deployed on active duty comes with its own unique challenges. We hope this guide has been helpful in demystifying the military capital gains exemption, but it’s wise to pair this information with guidance from your tax professional to help put you at ease.

Header Image Source: (Karolina Grabowska / Pexels)

Between home improvement projects, taxes, and commission fees, the cost to sell a house nationally tallies up to an estimated $31,308 on average, a recent study by HomeLight reveals. Thankfully, targeted home upgrades and a great agent’s expertise can add significant value and help you maximize your sale price.

Our analysis took into account median home prices, current housing industry fees and taxes, and recent home improvement cost data to estimate sale costs from pre-list to close countrywide and in 30 of the most populous U.S. metros.

We found that selling a house costs money no matter where you live, but factors like home prices, state policy, the cost of home services for the area, and local transaction customs can vary drastically between markets and ratchet up the cost to sell.

Dig into city-level data in the charts below, and keep reading for key takeaways and a breakdown of our full methodology.

Higher home prices hike up sale costs

Because many home sale fees are calculated ad valorem as a percentage of property value, the typical cost to sell a house can increase significantly in cities with higher-than-average home prices.

In San Francisco, for example, where the median home price is nearly $1.4 million, we estimated that it costs $111,084 to sell a house on average, over three times the national average. Seattle takes second place for the most expensive market to sell a home, with sellers spending an estimated $66,420.

By contrast, sellers in Minneapolis ($15,203) and St. Louis ($14,891) are the major metro markets where home sale costs trend the lowest on average.

Make sure your agent is worth their commission

Agent commission fees are generally the largest cost associated with selling a home. However, our data at HomeLight shows that the right real estate agent can make up for their commission rate and then some.

According to our home sales database, the top 5% of agents sell homes for as much as 10% more than the average real estate agent. That’s not to mention the countless hours they save sellers by handling offers, negotiations, and paperwork.

Taxes take a big chunk at closing

State and local policy can also increase the fees associated with selling a home. Real estate transfer taxes, a one-time fee levied on the sale as a percentage of property value and used to generate revenue for your state, county, or city (and sometimes all three) vary across the country.

For example, in our study, Washington, D.C. has the fifth highest home prices among the metro areas studied but ranks as the third most expensive metro with regard to selling costs. That’s largely attributable to the hefty tax of 1.45% imposed on D.C. sales of $400,000 or above, which sellers are typically on the hook to pay for.

Don’t forget about home prep costs

When it comes to getting a house ready for sale, our study found that the top five most expensive metros for common pre-sale efforts like acquiring a dumpster, hiring for basic lawn care, and staging a home are all in California due to the Golden State’s high cost of goods and services.

These metros include San Francisco (where it costs an estimated $9,577 to prepare a home for the market), Riverside ($9,225), Los Angeles ($8,678), San Diego ($8,359), and Sacramento ($7,847).

Houston ($7,489), Seattle ($7,032), and Miami ($6,533) are also pricey places to whip a house into selling shape. Sellers in San Antonio ($4,591) and Chicago ($4,195) are in luck, though — in these metros, the cost of efforts like lawn care and staging are most affordable.

Thankfully, the money you spend to improve your home before putting it on the market can provide a great return on investment. Staging alone can increase a home’s sales price anywhere from 1%-20%, according to 67% of top agents we surveyed.

The couple hundred bucks you’ll spend on basic lawn care prior to listing will pay off in a big way, too. In fact, 91% of top real estate agents recommend caring for the yard prior to resale, an effort that on average will result in a $1,211 value increase or 352% ROI.

The cost to sell isn’t one-size-fits-all

The cost to sell your home will vary based on the level of prep work required and which fees apply to your locale. Sellers looking for a more tailored estimate can input their information into HomeLight’s Net Proceeds Calculator, which will add up the costs based on your estimated home value.

To Calculate Your Selling Fees, Start With a Home Value Estimate

Tell us a little bit about your property and we’ll provide you with an instant home value estimate to use as a starting point.

Get Estimate

Keep in mind, a conventional listing process isn’t right for everyone, either. For sellers in a hurry or who don’t have the upfront funds for home improvements, we recommend requesting a cash offer through our Simple Sale platform.

Through Simple Sale, we’ll match you with a cash buyer who specializes in your property and price point. You’ll also pay zero agent fees and get a fast closing. A home’s Simple Sale price is typically 90%-95% of market value — so we’ll also provide you with an estimation of what you could fetch on the open market with a top agent’s expertise for comparison.

Methodology

How our study was conducted:

Metro selection

We pulled the 30 most populous U.S. metro areas using data from the U.S. Census Bureau.

Median home prices

We collected median home price data at the national and metro level. For the national median home price cited in this study, we referred to the U.S. Census Bureau’s Q3 2020 report of Median Sales Price of Houses Sold for the United States. To gather median home prices at the metro level, we used HomeLight’s available transaction data for each city as shown on our local housing market overview pages and data from our partner site, U.S. News Real Estate.

Agent commissions

According to HomeLight’s Agent Commission Calculator, which uses real estate transaction data from thousands of home sales each year, the national average real estate commission rate is 5.8% of the sale price. This commission, paid for in total by the seller, is customarily split with the buyer’s agent responsible for bringing a buyer to the sale.

We applied the 5.8% rate to both the national and city level cost estimates. However, it should be noted that commission rates do vary by locale and can be negotiated.

Home prep costs

We then factored in costs for some of the most common pre-listing home improvements that sellers take on. We used HomeAdvisor’s True Cost Guide, collected from thousands of real customers, to input costs for dumpster rental, deep cleaning, interior painting, carpet installation, basic lawn care, and home staging* at the city and national level.

*Data for home staging wasn’t available for all locales. For any cities without local staging data, HomeLight pulled the statewide staging average. When no statewide average was available, we used the national average of $1,261.

Transfer taxes

States and municipalities levy “transfer taxes” for the transfer of property title from one party to another. To calculate a transfer tax cost estimate as close as possible for the local markets, we pulled transfer tax rates from each state’s legislative code and applied it to the metro’s median home price.

Currently, 13 states do not charge any transfer taxes, while these taxes can surge up to 3%-4% for homes over a million dollars in some states.

Note that, for the most part, our calculation does not account for any additional transfer taxes at the city or county level, which can vary. An exception to this is California, where most counties impose an optional tax at the same rate. San Francisco, however, has its own tiered tax rate based on property value that we factored in instead.

For the national level: A study from the George Washington Institute of Public Policy reported that state transfer tax rates range on average from 0.1%- 2.2%. We used an average 1.15% when calculating the estimated national average transfer tax on a median-priced home sale.

A few states specify that the seller must pay these taxes, although some are nebulous or say it’s negotiable between buyer and seller. We consulted First American Title’s guide to Real Estate Customs By State for guidance.

In states where the seller customarily covers transfer taxes, we applied the full tax rate to the metro area in calculating the seller’s fees. In states where the fees are negotiated or divided equally between buyer and seller, we applied half the tax rate to the seller’s portion.

Escrow fees

The national average escrow fee clocks in at around 1% and is usually split evenly between buyer and seller, according to American Family Insurance, a Fortune 500 company formed in 1927. There are exceptions, but that puts the seller portion at an estimated 0.5%, which is the rate we applied to the seller’s costs at the national and metro level in our study.

Title fees

Title fees are usually negotiable between buyer and seller in a real estate transaction. The owner and lender’s title policy together usually cost around 0.5%-1% of the purchase price, according to the American Land Title Association.

It often shakes out that the seller pays for the owner’s title policy, while the buyer covers the lender’s title policy. We estimated on average a 0.5% title fee charge where the seller cover’s the owner’s policy. In state’s where the owner’s policy costs are typically negotiated, we applied a 0.25% charge to the seller. For states where the buyer is usually responsible for covering both policies, we did not apply a title fee to the seller’s costs.

Access the full results of the study with the chart below: