Real Estate Tax For Newbies
First of all, there many kinds of taxes, but the tax specifically paid by sellers for houses for sale is called Capital Gains Tax. Sellers are imposed this tax when they make a profit or “gain” out of the sale of real estate that is not their main residence such as land, inherited real estate, buy to let, and business or commercial properties.
So how do you know how much capital gains tax you’re going to pay the taxman?
Usually, the gain is the difference between the amount of what you paid for the property for sale and the amount you received from the seller when you sold it. For example, if you bought a property at £80,000 and sold it £120,000, then you have a gain of £40,000.
There are specific cases when this formula isn’t applied, however. When the property you sold was a gift; sold at a lesser price in order to help out the buyer; or inherited; or owned before April 1982, then, rather than finding the difference of the purchase and selling price, you trade the market’s average house price for the purchase price. So if the house you sold has a market value of £100,000 and it was sold at £110,000, the the gain is £10,000.
When you’ve finally computed the gain of the sale, you can still lower it’s amount through allowed deductions or applying for tax reliefs.
Associated costs in selling the house like estate agents’ and solicitors’ fees and costs of improvement works are just some of the commonly accepted deductions by taxing authorities. So if like in the previous example, the gain was at £40,000, and the property renovation costs and agent fees racked up to £30,000, then your gain is £10,000.
Tax reliefs, on the other hand, are usually given to business owners when they sell properties used in their business, and this may help in reducing the amount of capital gains tax the business would have to pay.
But if your business is created for buying and selling property, you don’t actually pay capital gains tax, instead you’re going to have to pay the rate on income or corporation tax depending on your participation in the business.
Note that these rules on capital gains tax also apply even to properties located overseas owned by UK residents. If the sale is taxed on the country where the property is located, then the owner can claim a tax relief on the amount he paid overseas.
As a bonus for all you readers out there, remember that you don’t always have to pay tax! If the property falls within the following, you are exempted from paying capital gains tax:
- Gifts or donations to a spouse, civil partner, or a charity
- The property is a business asset
- The property is inhabited by a dependent relative, provided the applicant meets certain requirements.