Do you know what kind of taxes you’ll have to pay when selling a rental property in Memphis, Tennessee? Whenever you’re selling any kind of house, there’s a lot of focus on listing prices, closing costs, mortgages, and move-out schedules. But not everyone takes the time to talk about taxes. It’s understandable as taxes can be considered one of the most confusing and frustrating parts of selling a house on the open market. This is especially true if you’re not an accountant or tax expert. In fact, some sellers don’t even account for taxes that they might be responsible for when selling their house.
Let’s take a very important closer look at what you need to know about taxes on selling a rental property in Memphis. The most important thing might be to know that you can avoid paying almost all taxes on your rental home by selling it as-is to a cash buyer like Fair Cash Deal. However, if you plan to take your chances on the open market, you’ll want to know about all the potential tax-related issues awaiting you.
What You Need To Know About Taxes When Selling A Rental Property
Understand the Capital Gains Tax
More than any other tax to consider when selling your rental house or any house for that matter, you want to know about the capital gains tax and how it works. Capital gains are the “gains” in appreciation that will become your profit when you sell your rental house in Memphis. Basically, capital gains are the difference between the price you paid for the house and the price you eventually sell it for. It’s the market value that your rental house has gained since you bought it. The capital gains tax rate that you’ll pay will depend on your income as rates range from zero to 15 and up to 20 percent.
How To Avoid Capital Gains Tax
For those selling their rental house, the federal tax law will allow for the first $250,000 (or $500,000 from joint filers) in capital gains to go tax-free. Any profits that you receive over that amount would still be taxed even if you get the exemption. However, there’s are some caveats with that tax exclusion that you need to be aware of. You have to have lived in your home for at least two of the past five years and not claimed the same exclusion on a different residence within two years, which can be an issue since you’re selling a rental house. If you’ve had other tenants living here the whole time, you might not be able to claim the exemption, but check with a tax expert to make sure.
There are other circumstances that may affect eligibility as well, which concern servicemembers and those dealing with divorce or death. You’ll want to read up on the specifics of capital gains in order to understand exactly where you stand and what you’re able to avoid in taxes when selling your rental house in Memphis. If you can avoid paying taxes legally, why wouldn’t you want to do that?
When Are Your Taxes Due?
Understanding the taxes that you need to pay when selling your house is important. Knowing when your taxes need to be paid is equally important. Any capital gains taxes that you end up owing on the sale of your house will need to be paid at the tax deadline for the same year of the sale. So if you sold your house on July 10, 2020, you need to pay taxes on the sale when you do your 2020 tax return, which is due April 15, 2021.
However, there are some situations that may require you to pay estimated tax payments before that deadline. In fact, some owners will automatically start making estimated tax payments during the year so they don’t get hit with the whole tax bill in April. That may or may not be possible for you.
Something else you can consider doing is increasing your withholdings through your job. This will cut down on the amount you owe at the end of the tax year because you will have been paying a bit more throughout the year already. So for example, if you think you’ll owe around $10,000 in capital gains taxes on the sale of your rental house, you could increase your paycheck withholdings and that will cut into that amount before April. Be sure to consult a tax professional first to make sure you’re in a position to handle less money in your paycheck.
Remember Mortgage Taxes
Most states impose a document transfer fee, which is also known as a real estate transfer fee or stamp tax. This fee is imposed on the sale of a property and is meant to recover the cost of recording deed changes as well as other documents filed with state and local governments. In Tennessee, you are required to pay what’s called the Tennessee recordation tax, otherwise known as Tennessee mortgage tax. This tax is a fee on all transfers of the property once recorded.
The amount can differ but is likely to be around $0.115 per $100 of the amount that you’ve borrowed. So let’s say the sale price of your house is $200,000. That means you’re paying $230 Tennessee recordation taxes. It’s common for the market buyer and the seller to split this fee, but it can also be something that is negotiated over.
Property Taxes
Many states don’t make it easy when it comes to figuring out what your property taxes will be in a given year. Some states don’t even collect property taxes. However, the counties, cities, school districts, and other local authorities may instead charge property taxes, and each one can vary depending on where you live and what the local laws are.
The good news is that Tennessee is on the lower end of states when it comes to property tax. The median annual property tax paid by Tennessee homeowners comes out to around $1,120, which is half of the national average on property taxes. The average effective property tax rate comes in around 0.74% in Tennessee.
So if you have a rental house valued at $176,000, the median home value, you’ll pay around $1,314 in annual taxes on it. For the median home value in Tennessee, which stands around $139,900, you’ll pay around $1,046 in annual taxes.
Where do these numbers come from? A county assessor calculates the market value of your house every year and then you’re charged based on that number. You’re often expected to make that payment over two periods during the year.
Avoid Taxes Altogether
Given all of the potential problems that come with paying taxes when you’re trying to sell your rental house in Memphis, Tennessee, it’s makes sense that you might just want to avoid the hassle altogether. But if you want to sell your rental house fast and avoid paying many of the taxes that dilute your profits and gains, consider selling your Memphis rental house as-is to Fair Cash Deal.
Fair Cash Deal will buy your rental house in any condition or financial situation, even if you’re already dealing with tax or lien issues. You just need to contact us about your rental property and we’ll touch base ASAP. We’ll schedule some time to meet you at the property or get more information we need to make a solid offer. Don’t worry about cleaning up or making repairs, we’ll handle all the problems so you don’t even need to worry about it. We’ll also make you a fair cash offer based on the value of the house. No mortgages to wait for approval on. No real estate agent commissions to pay. And you can cut out most of all of the taxes involved. And once you accept the offer, we close on your schedule and pay you cash for your house!
