Paying Real Estate Taxes
It’s safe to say that no one likes to think of taxes unless it’s April 15th and you’re expecting a return in the mail. But those involved with For Sale By Owner (FSBO) transactions should be able to know their way around real estate taxes. Not only are they saving the 6% they would normally spend on a realtor, it’s an essential for making the most out cash of your sale.
Real estate taxes are unfortunate reality, but the funds go directly towards the places where you live and work. This includes local parks and schools, street repairs, and water systems just to name a few. Rates will vary depending on the city or county you live in, so before you close on a FSBO deal, it’s best to do research beforehand to get an accurate estimate. Real estate taxes are paid on top of your mortgage, so it’s best to budget for them.
beycome is here to provide For Sale By Owner help and resources to those who might be uneasy about preparing tax payments. You can also read beycome’s 10 key tax facts about home sales to get you started.
How to Calculate Real Estate Taxes
If you’re a homeowner, then you know that property taxes are paid twice a year. Typically the bills come in on the first days of March and September. Because FSBO sellers close on their house in the middle of a tax period, the bill must be reasonably split between the buyer and the seller. So the tax is divided into two parts:
So how do you calculate this divide? You can start with the monthly rate, and then translate that number into a daily rate. Here’s a For Sale by Owner example from beycome:
Let’s say that a property’s six month tax bill equals $2,400, or $400 per month. Simply divide that number by 30 for a daily rate of about $13.33. If the buyer occupies the property on the 15th of the month, multiply $13.33 X 15, or $199.95. The buyer is responsible for this amount.
If the seller has already paid for these days, then the buyer essentially reimburses the seller on the closing date. For more help calculating and paying a real estate tax bill, check out beycome’s list of real estate lawyers and trusted attorneys who can walk you through the FSBO process.
Potential Tax Changes
You should know that before you enter into a FSBO real estate agreement, the tax may vary moving forward. So if your property has gone through extensive renovations and then a reassessment, for instance, then property taxes may go up. Taxes may also go down if the general neighborhood has undergone large damages in the last year, such as massive flooding. That being said, most people will not experience a big change in their real estate taxes. As property trends change over time, so will property value.
Paying Taxes on the Sale of Your Home
FSBO sellers, great news! You may not have to pay taxes on the sale of your home. If you have gains that are less than $250,000 (for single individuals) or less than $500,000 (for married couples), then you qualify. You do not have to pay taxes on this income.
Keep in mind that this does not count for investment properties or commercial properties. You must own and live on the property as your primary residence for at least two years. Also, you also can’t have gained from the sale of another home in the last two years. However there are no limits to how many times this exemption can be used.
Calculating the Taxes on the Sale of Your Home
If you sold your home FSBO and made more than these amounts, you will pay taxes on the amount of gain that is more than the excludable amount. So, if you made a $300,000 FSBO sale as a single person, you’re only taxed for the additional $50,000. You can reduce this amount by keeping records of improvements you made to the property while you owned it. Using this example, if you spent $20,000 in additions and repairs, then you will only be taxed for the remaining $30,000.
beycome’s Financial Resources
While there is much involved with the For Sale By Owner process, beycome has the resources you need to navigate the financial waters safely. Check out our FAQs on Mortgage Solutions to read more about financing and lending a purchase or find out more information on purchasing a home from the very beginning of the process to the end.