Benjamin Franklin said that there were only two certainties in life: death and taxes. Selling your house in North Carolina is no exception. Of course, you don’t have to die to sell your house but you do have to pay taxes. You will want to account for those taxes as you plan for your house sale.
The first thing to know is that taxes do vary by locality. Different counties and towns may have slightly different requirements so, it’s a good idea to check with your county and city governments for any specifics. You can get state information at the North Carolina Department of Revenue.
Everyone wants their pound of flesh, so you may owe tax to local authorities, state authorities and even the federal government. Each of these have their own rules and not all of them show up at the closing table, so you may owe the tax later on but you will have to pay it.
Even though your property taxes may only be due at set times of year, when you sell your house, you have to pay your portion. These are called prorated property taxes. In North Carolina, annual tax liens are filed on the first of the year with bills being mailed out in August. This means that depending on what time of year you sell your house, you will owe the remaining portion of the taxes for that year. Some times of year, you get a nice bonus because the buyer will have to reimburse you for taxes that you’ve already filed.
NC Register of Deeds tells us that we have to pay something called an excise tax when selling your property. This is basically a sales tax from the state on selling the house. you while you are selling your house in North Carolina. This amounts to $1 in $500 but it might be easier to think about it this way. For every $100,000 of your sale, you pay $200. For a $200,000 you pay $400 or for a $350,000 property, you pay $700. As the person selling your house, you pay this tax.
Capital Gain Tax
Any time that you are making money, the government wants its cut. Selling real estate is the same. Even though it may have been your home and you didn’t think of it as making money, hopefully its value has gone up and you are selling your house for more than you bought it for. There are a few exceptions to this which we’ll go over but the short story is that this is complicated to calculate and you should have an accountant help you.
Be careful though. This tax isn’t due at the closing table, it’s paid on your annual taxes. It’s nice that you don’t have to pay that money when you close on your house, but it also means you need to be careful before spend any money that you make from the sale. This can be a really ugly surprise come tax time.
To calculate the capital gains tax, you need to know what the government thinks you paid for your house. This includes the cost of the house but a number of other money that you paid out over time. This is why you need to keep good records because if you are ever audited the IRS will expect you to prove it. This total number is called your “cost basis”.
Here are some of the things that go into calculating your cost-basis when you sell your house:
- Purchase prices of the house
- Attorney fees
- Cost of any inspections
- Real Estate Commissions
- Any money that you put into your house to fix it or improve the value (e.g. replacing the roof, adding a room). There are some rules around this (of course.) The government has some good information here.
You then deduct this cost basis number from the amount that you sold your house for and you have to pay taxes on the difference which is called your “capital gain”…almost. The government does give us a few breaks.
Exceptions to Capital Gains
The government does give us a few breaks that are worth knowing about. As with anything in taxes, there are rules around this, so check with your accountant, but here’s some information to get you started.
- Selling Your Home – If you are selling your primary home, where you lived for at least two of the last five years, you can deduct $250,000 if you’re single and $500,000 if you’re married from the capital gain amount. It’s a nice bonus and covers most of us. Remember that it doesn’t apply to investment properties.
- Inherited Property – There are different rules for calculating your costs basis for inherited property. These can get complicated but is a great benefit, so if you inherited your property, definitely talk to an account. It can help you get all or most of the capital gains tax free.
Paying Your Dues
Unfortunately, for anything financial, the government wants its cut. Our biggest financial transactions in our lives are often selling our homes and that means the tax bills are also big. Make sure that you know about these before you show up at the closing table expecting a certain amount and suddenly it’s much lower. Worse yet, you spend all the money (perhaps including buying a new house) and you didn’t account for the capital gains tax due in April.