Taxes on Selling a House in Arkansas
Selling your house can be an overwhelming experience, especially if you’re not familiar with the tax laws surrounding it. In Arkansas, you will be required to pay taxes on the sale of your home, which can be a significant financial burden if you’re not prepared. In this article, we’ll cover the basics of taxes on selling a house in Arkansas.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit you make from selling an asset, such as a house. The tax is calculated based on the difference between the sale price of the house and its original purchase price. If you sell your house for more than you paid for it, you’ll owe capital gains tax on the difference.
Do You Have to Pay Capital Gains Tax when You Sell Your House?
In Arkansas, you may be required to pay capital gains tax on the sale of your house. However, there are some exceptions to this rule. For example, if you’ve lived in the house for at least two out of the past five years, you may be eligible for an exclusion on the capital gains tax.
Short Term Capital Gains Tax
Short term capital gains tax applies if you sell your house within a year of purchasing it. This tax rate is typically higher than long-term capital gains tax.
Long Term Capital Gains Tax
Long-term capital gains tax applies if you sell your house more than a year after purchasing it. This tax rate is typically lower than short-term capital gains tax.
Is There a Way to Avoid Capital Gains Taxes?
There are some ways to avoid capital gains taxes when selling a house in Arkansas. For example, you may be eligible for a 1031 exchange, which allows you to defer paying capital gains tax by reinvesting the proceeds from the sale into another property. Additionally, if you’re over 55 years old and have lived in your house for at least three out of the past five years, you may be eligible for a one-time exclusion on capital gains tax of up to $250,000.
It’s important to note that tax laws can be complex, and the best way to ensure you’re paying the correct amount of taxes is to consult with a tax professional.
How Do You Qualify for Capital Gains Tax Exemption?
If you’re planning to sell your home, it’s important to know whether you will be subject to capital gains tax. However, there are ways to qualify for capital gains tax exemption. Here are the requirements you need to meet:
Ownership requirement
First, you must have owned the property for at least two years within the past five years leading up to the sale. This is known as the “ownership requirement.”
Residence requirement
Second, you must have used the property as your primary residence for at least two years within the past five years leading up to the sale. This is known as the “residence requirement.”
Lookback requirement
Third, you can only claim the capital gains tax exemption once every two years. This is known as the “lookback requirement.”
If you meet these requirements, you may be eligible for the capital gains tax exemption. However, there are certain exceptions to these rules.
Is There an Exception to the 2 out of 5 Year Rule?
If you’re unable to meet the 2 out of 5 year rule due to a change in employment, health conditions, or other unforeseen circumstances, you may still be eligible for a partial exemption. The IRS has a list of exceptions that may apply, and it’s worth consulting with a tax professional to determine if you qualify for any of them.
Is There a Partial Exclusion of Gain?
If you don’t meet all of the requirements for the full capital gains tax exemption, you may still be eligible for a partial exclusion of gain. This applies if you’ve lived in the property for less than two years, for example. The amount of the exclusion depends on how long you’ve lived in the property and other factors. A tax professional can help you determine if you qualify for a partial exclusion.
Illustration: Capital Gains Tax on the Sale of Your Home
Let’s say you bought a house for $200,000 and sold it for $400,000 after five years. Assuming you meet the ownership and residence requirements, your capital gains tax would be calculated as follows:
- Purchase price: $200,000
- Selling price: $400,000
- Profit: $200,000
- Capital gains exclusion: $250,000 (for single taxpayers) or $500,000 (for married taxpayers)
- Taxable capital gains: $0
However, if you did not meet the ownership and residence requirements for the capital gains tax exemption, you may still be able to exclude a portion of the profit from your taxable income using the partial exclusion of gain formula.
What are Other Taxes on Sale of a Home?
When selling a home, it is not only the capital gains tax that sellers need to consider, but also other taxes that may be applicable. Here are some of the other taxes that may come into play:
Real Estate Transfer Taxes
Arkansas imposes a real estate transfer tax of $3.30 per $1,000 of the sale price of the property. This tax is typically split between the buyer and the seller, although in some cases, the buyer may be required to pay the full amount. It is important to note that this tax is separate from any local transfer taxes that may be imposed by cities or counties.
Property Taxes
Property taxes are taxes that homeowners pay based on the value of their property. When a home is sold, the seller will typically be responsible for paying property taxes up until the date of the sale. The buyer will then be responsible for paying property taxes for the remainder of the year. In Arkansas, property tax rates vary by county and can range from 0.62% to 1.54% of the assessed value of the property.
Do You Have to Pay Taxes when Selling a Second Home?
If you are selling a second home or investment property, you may be subject to additional taxes. When you sell a second home, any gain you realize will be subject to capital gains tax. In addition, if you have been renting out the property, you may also be subject to depreciation recapture tax. This tax applies when you sell a property that you have been using as a rental and have claimed depreciation deductions on.
Is There a Way to Minimize Taxes when You Sell Your Home?
While it may not be possible to completely avoid paying taxes on the sale of your home, there are some strategies you can use to minimize your tax liability. Here are a few examples:
Convert the Property into Your Principal Residence
If you own a second home or investment property that you would like to sell, consider moving into the property and making it your primary residence for at least two years before selling it. By doing so, you may be able to qualify for the capital gains tax exemption and avoid paying taxes on the gain.
Convert Your Home into a Rental Property
If you are planning to sell your home but do not want to pay capital gains tax, you may be able to convert your home into a rental property and hold onto it for a few years. By doing so, you may be able to take advantage of the tax benefits of owning a rental property, such as depreciation deductions and the ability to defer taxes on the gain through a 1031 exchange.
Investing in an Opportunity Zone
An Opportunity Zone is a designated geographic area that is designed to encourage investment and economic development in low-income communities. By investing the proceeds from the sale of your home into an Opportunity Zone fund, you may be able to defer paying taxes on the gain for up to 10 years, and potentially avoid paying taxes on the gain altogether if certain requirements are met.
By considering these strategies and working with a knowledgeable tax professional, you may be able to minimize the amount of taxes you have to pay when selling your home.
Now that you have a better understanding of the various taxes that may be applicable when selling a home, as well as some strategies for minimizing your tax liability, you can make informed decisions when it comes to selling your home.
Do a Like-Kind/1031 Exchange on Investment Property
If you own an investment property and want to sell it, you may be able to do a Like-Kind Exchange or a 1031 Exchange. This allows you to defer paying taxes on the sale of the property if you use the proceeds to purchase a similar investment property within a certain timeframe. The Like-Kind Exchange can be a complex process and it is important to work with a qualified intermediary to ensure the transaction meets the legal requirements.
Tax-Loss Harvesting
Another way to minimize taxes when selling your home is through tax-loss harvesting. If you have investments that have lost value, you can sell them and use the losses to offset the gains from the sale of your home. This strategy can be especially useful if you have large gains from the sale of your home and want to offset them with losses from other investments.
Raise Your Cost Basis by Home Improvements
Making home improvements can increase your cost basis in the property, which can help to lower your capital gains tax liability. For example, if you purchase a home for $200,000 and spend $50,000 on home improvements, your cost basis would increase to $250,000. When you sell the home for $300,000, your capital gains tax liability would be calculated based on the $50,000 gain, rather than the full $100,000 gain.
Partial Capital Gains Exemption
If you don’t meet the ownership and residence requirements for the full capital gains tax exemption, you may still be eligible for a partial exemption. This is available for homeowners who sell their home due to a change in employment, health reasons, or unforeseeable events. The partial exemption is prorated based on the amount of time you lived in the home as your primary residence.
Work Relocation
If you are relocating for work, you may be able to avoid paying capital gains taxes on the sale of your home. To qualify, the new job must be at least 50 miles away from your current home and you must move within one year of starting the job.
Health Emergency
If you need to sell your home due to a health emergency, you may be eligible for a partial capital gains tax exemption. To qualify, the sale of the home must be due to a change in health status that makes it difficult for you to live in the home.
Unforeseeable Events
If you experience an unforeseeable event that forces you to sell your home, such as a natural disaster, divorce, or death in the family, you may be eligible for a partial capital gains tax exemption.
Consider Installment Sales to Lower Taxes
If you are selling a property for a large amount, you may want to consider an installment sale. This allows you to spread out the payments over a period of time, which can help to lower your tax liability. However, it is important to work with a tax professional to ensure that the transaction is structured correctly.
Closing Thoughts: Taxes on Selling a House in Arkansas
Navigating the complexities of taxes on selling a house in Arkansas can be challenging, but there are strategies you can use to minimize your tax liability. By understanding the rules and working with a tax professional, you can make informed decisions about how to sell your home and minimize your tax burden. If you are considering selling your home, it is important to work with a reputable and experienced real estate company that can help guide you through the process.
365 Property Buyers is a “we buy houses” company that can help you sell your home quickly and easily, without the hassle of traditional home sales. Contact us today to learn more. (501)369-0365
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Author: Joey Deskin
Joey Deskin is a successful real estate investor and former Explosive Ordnance Disposal technician with 24 year of military service. Joey developed an early interest in real estate and started investing in properties while serving in the military. After several successful deals, he decided to pursue real estate investing full-time. When he’s not working, Joey enjoys flying single-engine aircraft and spending time with his wife Holly and their three daughters.
