Selling your home in Connecticut can be a major financial move with many tax implications to consider. Understanding what you may owe when you sell between federal capital gains taxes, state transfer taxes, and more is crucial. Proper planning can help you legally minimize your tax burden and walk away with more profits in your pocket. This guide will explain everything you need to know about the taxes in selling Connecticut real estate.
Federal Capital Gains Tax
You may also be liable for capital gains taxes on your home if you sell it for more than you originally purchased it and don’t qualify for capital gains exclusion.
To qualify for the maximum $250,000 capital gains exclusion as an individual filer, you must have owned and used the home as your primary residence for at least two out of the past five years. Married joint filers can exclude up to $500,000. Shorter absences like vacations or illnesses don’t disqualify you.
If you don’t qualify for the total exclusion, your taxable gain will be based on the difference between the sale price and your adjusted cost basis in the home. Your cost basis is what you paid for the house initially, then adjusted for capital improvements and depreciation over the years. So, if you bought your home for $200,000, made $20,000 in upgrades, and sold it for $270,000, your taxable gain would be $50,000.
Connecticut follows the federal capital gains tax rates, which range from 0% for lower-income taxpayers to 20% at the highest brackets. Consult a tax professional to calculate what you may owe based on your tax bracket.
You can reduce your capital gains liability by reinvesting in another home. Single filers can roll over $250,000 and joint filers $500,000 when buying a new primary residence within two years.
Connecticut Real Estate Conveyance Tax
One tax that almost all Connecticut home sellers will be responsible for is the conveyance tax, which is essentially a transfer tax imposed when property changes hands. This tax consists of both a state portion and a local portion.
The state conveyance tax rate is 0.75% on the first $800,000 of the sale price and 1.25% on the amount between $800,000 and $2.5 million. For luxury homes over $2.5 million, the rate is 2.25%. Local municipalities also charge conveyance taxes ranging from 0.25% to 0.5% of the sale price.
For example, on a $500,000 home sale in Danbury, the state would collect $3,750 (0.75% of $500,000), and the city would collect $1,250 (0.25% of $500,000) for a total conveyance tax of $5,000. On a $1.5 million sale in Greenwich, the state would collect $11,250 (0.75% of $800,000 plus 1.25% of $700,000), and the town would collect $7,500 (0.5% of $1.5 million).
As the seller, you are responsible for paying the conveyance taxes. It’s essential to account for these costs when determining your net proceeds. Enlist the help of a lawyer to estimate the conveyance taxes for your specific transaction.
Connecticut Property Tax
Home sellers are responsible for paying property tax for the portion of the year they still owned the home before closing. In Connecticut, you pay these taxes to cities and towns where the property is. The state does have some oversight, but most of the time, you will deal with local officials.
Homeowners in CT pay a property tax at an average rate of 1.96%, effectively double the national average. You pay tax based on the assessment done by the assessor assigned by the local municipality. Once they establish a fair market value on your home, they apply a statewide assessment ratio of 70%, on which you will pay property tax. Upon closing, your attorney will complete a municipal lien search to determine if any property taxes are outstanding. Buyers will expect any owed amounts to be paid at closing.
Set aside money from your sale proceeds to cover your final property tax bill. It prevents any surprise taxes owed that eat into your profits.
How to Minimize Taxes When Selling in Connecticut
Now that you understand the applicable taxes in Connecticut, here are some strategic tips to reduce what you owe upon selling your home in CT.
Sell as your Primary Residence
You do not pay any capital gain tax if you have owned and used the property as your primary residence for at least two years in the last five years. Consider moving in if you don’t meet the minimum criteria.
Save Tax with Home Improvement
You pay no tax if your profit is less than $250,000 if single or $500,000 for married couples filing jointly. It is important to note that any significant home improvement or renovation can be deducted from the profit.
Keep detailed records of all improvements made over the years. Home renovations like room additions, kitchen overhauls, new bathrooms, exterior upgrades (roofing, siding, windows), and other enhancements increase the basis.
Harvest Tax Losses
Tax loss harvesting involves the strategic sale of investments that have experienced a decline in value. This practice aims to generate capital losses, which can then be used to offset capital gains arising from various sources, such as selling assets like your home. For example, if you trade stocks or another investment property at a net loss of $20,000 in the same tax year, you can use up to $20,000 to reduce the capital gain from selling your primary residence. It directly lowers the taxes you’ll owe on the home sale.
Tax loss harvesting works best when you have taxable capital gains that the losses can be applied against. Work with a tax advisor to maximize the benefits of tax loss harvesting. They will also help you implement it correctly.
Plan an Installment Sale
Another strategy to defer taxes on the sale of your home is to structure it as an installment sale. It involves offering the buyer financing and receiving the sale proceeds over several years rather than in a lump sum. To qualify, at least one payment must come after the tax year of the sale. Each payment consists of a portion of taxable gain, non-taxable return of principal, and interest income. The gain percentage is calculated at the outset based on your profit.
A tax professional can assist in correctly reporting the installment sale each year on IRS Form 6252 and Schedule D to spread capital gains over time. It can help reduce your tax rate compared to declaring the entire gain in one year. However, depreciation recapture is still accelerated. Installment sales require thorough documentation and interest charges at applicable federal rates. Consult a qualified tax advisor so your transaction complies with local and state laws.
Taxes and fees can take a chunk out of the equity of selling your house in Connecticut. Although taxes are unavoidable, you can save on other charges such as closing costs, agent fees, and commission by selling your home in cash to Neighbor Joe.
We are your local cash home buyers, buying your house regardless of its condition. Avoid lengthy assessments and inspections, costly repairs, and the uncertainty of listing your home and selling it to us today. Contact us for a no-obligation quote, and we can close in as few as seven days.