Before You Spend That Check: Capital Gains on a Home Sale in North Carolina

You’ve probably already planned where you’ll use the money from your sales proceeds, even before heading to closing. That’s understandable, but make sure you don’t overlook capital gains taxes. The federal and state governments may ask for a cut from your home sale proceeds.

In this guide, we’ll share exactly how capital gains work in North Carolina and whether you’ll owe more than you expected.

Do You Pay Capital Gains When You Sell a House in North Carolina?

Yes, you have to pay capital gains tax when you sell a house in North Carolina. If you make a profit on the sale, North Carolina requires you to pay a flat 3.99% tax.

You’ll also have to pay the IRS for the federal capital gains tax on the home sale. The tax rate varies depending on how long you’ve owned the property, which we’ll discuss in depth in a later section.

However, not every seller will owe a tax bill. Qualified homeowners can access many exclusions and deductions. Sometimes, even hundreds of thousands of dollars in profit can be sheltered from taxation.

Short-Term vs. Long-Term Capital Gains on a Home Sale in North Carolina

Federal capital gains on home sales in North Carolina are either short-term or long-term. The difference depends on how long a seller has owned their home.

If the seller owned the property for one year or less, short-term capital gains apply. The tax rate ranges anywhere from 10% to 37%, depending on filing status and income.

On the other hand, long-term capital gains apply to properties owned for more than a year. The gain may be taxed at 0%, 15%, or 20%, depending on your filing status, tax bracket, and taxable income. Many homeowners fall into this category because selling after a year is more common.

How Does Your Tax Basis Affect Your Gains?

The tax basis is your home’s original purchase price plus closing costs and fees, and any improvements you made while owning it. Your basis directly affects your taxable gain because it is one of the variables used to calculate it.

The formula for calculating your gain is:

Sale price – Basis = Gain

If you have a higher basis, your gain will be much lower, resulting in less tax. Conversely, if you have a lower basis, your taxable gain will be higher.

Many North Carolina home sellers have a higher basis than what they expect because it already reflects all the capital improvements they made to the property. This means that even if you sold the same year as your neighbor and your properties are almost the same size, you can have entirely different gains.

What Is the Section 121 Exclusion?

The IRS Section 121 Exclusion is a tax rule that allows homeowners to exclude up to $250,000 in capital gains tax if they’re filing single or $500,000 if they’re filing jointly. This is quite a big deal because if you qualify, you could owe nothing at all.

Who Qualifies for the Home Sale Exclusion?

To be eligible for the home sale exclusion, the homeowner should pass the ownership test and the use test set by the IRS.

The ownership test requires the seller to have owned the property for at least 2 years of the last 5 years before the sale. Meanwhile, the use test requires that you have actually lived in that specific property as your primary residence for at least 2 of the 5 years.

You don’t have to live in the property for 2 consecutive years. If there’s a period when you rented out the property, that’s fine. As long as you have documentation showing it served as your primary residence for 2 years, such as utility bills or a voting record for that address, you can qualify.

Important Note: The home sale exclusion can’t be used if you applied for a 1031 exchange to buy the property within the past 5 years. Similarly, you’re also disqualified if you’ve claimed a 121 exclusion on another property within the past 2 years.

What If You Don’t Fully Qualify?

If you don’t qualify for the 121 exclusion, it doesn’t mean you won’t get any tax breaks at all. You can claim partial exclusion if you need to sell early due to these main qualifying reasons:

• You made a work-related move, like being transferred to a work location that is at least 50 miles farther from home than your last workplace
• You made a health-related move, like taking care of a sick family member, or the doctor suggested you move for health reasons
• Your property was condemned or destroyed by a natural disaster
• Your spouse died, or you got divorced

You can review the complete list of qualifying reasons in this IRS publication. If you need to sell your house fast in Raleigh, you may still qualify for a partial capital gains exclusion. The exclusion amount is based on the portion of the two-year ownership and residency requirement you completed before selling.

How to Calculate Your Tax Liability on a North Carolina Home Sale

To calculate your tax liability from your home sale, you first need to calculate your capital gain. As detailed earlier, your sale price minus your adjusted tax basis is your capital gain, which is then used to get your tax liability. You’ll also use that exact number to apply for the Section 121 exclusion if you qualify.

Capital Improvements That Can Lower Your Gains Tax

To get your adjusted tax basis, take your home’s original purchase price and add all the capital improvements you made to the property. If that number is high, your taxable gain will be lower.

So what exactly constitutes a capital improvement?

A capital improvement is any update that adds value to your home. Here are some examples:

• Replacing roofing
• Renovating or adding rooms
• Improving landscaping
• Installing solar panels and other energy-efficient fixtures
• Installing new heating and cooling systems
• Upgrading plumbing and electrical

You need documentation to prove these improvements, so make sure you keep old receipts and even permit records.

Selling Costs You Can Deduct From Your Gain

When you sell a property, many of the costs associated with the sale can be deducted from your profit before taxes are calculated. These expenses often include real estate agent commissions, title and settlement fees, legal costs, survey charges, and other closing-related expenses. Working with a tax planning professional can help ensure you maximize every eligible deduction. If you’re looking for a faster and simpler option, we buy houses in North Carolina and can help streamline the selling process.

Special Situations That Change Your Capital Gains Tax in NC

Some situations can change the tax rules you have to follow when calculating your capital gains on a home sale in North Carolina.

Selling an Inherited Property in North Carolina

When you sell an inherited property in North Carolina, you get to enjoy a huge tax advantage called a stepped-up basis. Your basis is reset to the property’s value at the original owner’s death, not to the original owner’s purchase price.

Let’s say you inherited your parents’ home, and it was worth $350,000 when they died. Even though they bought the property for $80,000 many years ago, your basis remains $350,000. If you sell immediately for $360,000, your only taxable gain is $10,000. What’s even better is that North Carolina doesn’t have an inheritance tax, so you save more money. Keep in mind that before you can sell the property, it typically has to clear probate.

Selling a Rental or Investment Property

Unfortunately, investment properties don’t qualify for the Section 121 exclusion because they’re not primary residences. You’ll be taxed at a normal rate based on your capital gain.

On top of that, you have to deal with depreciation recapture if you claimed it over the years. Depreciation recapture gets taxed at a federal rate of up to 25%.

One common strategy that investors use when selling a rental property is the 1031 exchange, which lets you reinvest your profit into another investment and defer taxes. Check out the IRS guidelines, as they are very strict about deadlines when applying for a 1031 exchange.

Selling a Home You Received as a Gift

A gifted home differs from an inherited one. While heirs of an inherited home get a stepped-up basis, individuals who were gifted a property inherit the owner’s original basis.

That means if the original owner bought the property for $350,000 and gifted it to you when it was worth $700,000, your tax basis remains $350,000. In this situation, you would have a large taxable gain once you sell.

Military Members and Foreign Service Personnel

Some government employees and active military members can suspend the 5-year required lookback period for up to 10 years while in service. They have more flexibility to meet the two-year use requirement of the IRS and can therefore time the sale without losing their exclusion.

How to Report Capital Gains on a North Carolina Home Sale

You have to report your capital gains at both the state and federal levels to avoid any legal issues or tax implications in the long run.

State Forms in North Carolina

Since your capital gains are treated as taxable income, they are reported on Form D-400. The gain is added to your individual income and is taxed at a flat 3.99% rate, as discussed a while back.

If you are a non-resident who received proceeds from a North Carolina home sale, your buyer needs to withhold 4% of the home’s price. Then they need to complete and submit Form NC-1099NRS on your behalf. The amount they’ll withhold is applied to what you owe once you file.

Federal Forms

There are two forms you have to fill out to report your home sale at the federal level:

• Schedule D attached to your Form 1040: This is the main form where you report your capital gains and losses.
• Form 8949: This form covers the details of the sale, including your basis and gains. The total you got from Form 8949 is stated directly in Schedule D.

Note that if you claimed the Section 121 exclusion and are not paying any capital gains tax, you may not need to report the sale, unless you received a Form 1099-S from the buyer. You still need to complete Form 8949 and Schedule D if that’s the case.

Transfer Tax in North Carolina

North Carolina imposes a revenue stamp tax, which is an excise tax on every home sale. The current rate is $1 per $500 of your property’s value, which works out to 0.2% of your total home sale price.

It’s not a very significant amount, considering you only pay $600 for a $300,000 home sale, but you should still expect it, so you don’t get blindsided. Another thing to note is that this could be transferred to the buyer if both parties agree.

Frequently Asked Questions About Capital Gains on a Home Sale in North Carolina

Do I have to report my home sale to the IRS even if I don’t owe any taxes?

You’re not required to report your home sale to the IRS if you don’t owe any taxes due to claiming the Section 121 exclusion. However, if you received a Form 1099-S from the buyer, you still need to complete Form 8949 and Schedule D.

Can I avoid capital gains tax if I buy another home right after selling?

No, you cannot avoid capital gains tax by buying another home right after selling. Even if you are an investor, you only get to defer your capital gains by doing a 1031 exchange, not avoid them completely.

What happens if I sell my North Carolina home at a loss?

If you sell your North Carolina home at a loss, you won’t have any capital gain, so there’s nothing to tax. A loss on a primary residence is also not tax-deductible, meaning it can’t offset other gains you have in the same year.

Can I claim the Section 121 exclusion if I own multiple properties in North Carolina?

The Section 121 exclusion is only used for homes used as your primary residence. You cannot claim an exclusion for your vacation home and other properties unless you convert it to your primary residence and live in it for 2 years within the 5 years before selling. Any property you did not use as your primary home is taxed regularly.

Can I use home office deductions to reduce my capital gains when I sell?

You can claim the home office deduction without disqualifying part of your home from the Section 121 exclusion. However, you still have to pay depreciation recapture tax when you sell if you claimed that over the years.

Does capital gains tax apply if I sell my North Carolina home during a divorce?

Capital gains tax applies if you sell your North Carolina home during a divorce. Even if you haven’t met the use test requirement yet, as long as the sale is part of a divorce settlement, you may qualify for partial exclusion.

Is there a way to defer capital gains tax on my North Carolina home sale?

You can only defer paying your capital gains tax in your North Carolina home if it is a rental or an investment property. It’s possible to roll the proceeds into a new investment property through the 1031 exchange, which effectively halts taxation. Deferring capital gains for your primary residence is simply not possible, but you can still claim full or partial exclusion.

Key Takeaways: North Carolina Guide to Capital Gains on Selling a House

Ultimately, your taxable gain is the difference between your home’s sale price and your adjusted tax basis. Whether you are required to pay a large sum for your federal tax liability depends mostly on how long you held the property and your filing status. Meanwhile, you have to pay a state tax rate of 3.99% because North Carolina treats your gain as regular income.

If concerns about capital gains taxes are making you hesitate to sell, working with a cash home buyer may help ease some of the financial pressure. While no buyer can reduce what you may owe the IRS or state, a cash sale can help minimize closing costs, repairs, and other seller expenses. Cardinal Home Buyers buys houses cash — call us today to get started with a no-obligation offer.