What is sales tax? Sales tax is an additional fee that sellers are obligated to pay when they sell their home or business. It’s not like income tax, which everyone owes regardless of wealth.
Sales taxes vary by state and can be very confusing. Some states only assess tax once you hit the one-year mark in your house sale while others continue to add new taxes as time goes on.
And some states require you to report your house sale on a different form than what used to be required. Fortunately, Housetaxes.com has all the information you need!
We have organized this site by state so it’s easy to find what info you’re looking for quickly. And don’t worry about getting everything correct; we leave that up to you and your accountant!
So whether you’re thinking of selling your current residence or buying a new one, make sure you understand how sales tax works before putting in offers and accepting ones.
Exempt items
Some of the things sold in real estate transactions are exempt from sales tax. These include some or all of the following:
Units (houses, condos, etc.)
Land
Acreage
Builders supplies (like ladders)
Certain types of furniture
Some business equipment like computers
These exemptions vary by state so check your local laws!
Most states also exclude certain foods and beverages while the sale is taking place which makes sense since those would be counted as merchandise.
Sales tax is based on the purchase price
In most states, sales tax is based on the sale of the property not the purchase of the property. This is different for close-out or liquidation sales where the seller will often include all of their belongings in the sale, including assets that they have already paid taxes on!
In these cases, the buyer is usually responsible for paying any additional state taxes due from the closing of the sale. The same goes if the seller don’t retain the right to use the home as his/her own after the sale.
This can get very confusing because depending on how quickly the sellers sell their other items, it may seem like there is no way to know what additional taxes are owed!
That’s why it is important to be aware of your state’s laws about real estate taxation.
Multistate sales tax
The way most states assess real estate taxes is by calculating your home’s value, multiplying it by your state property tax rate, and then adding up all of the state and local revenue that comes from the sale of this house and other houses in your area.
The tricky part is determining what constitutes “your house.” Most states count the land under your house as personal property, but some include the surrounding buildings (homes, offices, etc.) in their definition of business properties. This can result in very different calculations depending on whether you sell one of those homes or not!
Some states also assess an additional 3 to 5 percent surcharge for selling your house directly instead of going through a broker. These fees are usually paid at the time of closing, so be sure to account for them when figuring how much tax will get deducted from the price of your home.
Another potential source of confusion comes from states that require you to report the fair market value of your home on your income tax return. Unfortunately, there is no standard definition of what makes up fair market value, which means it may vary slightly based on who is asking about it.
What is the Fair Market Value?
A few years ago, the IRS made changes to its rules regarding what items make up the fair market value of a house. Before these guidelines were put into place, only the cost to build a similar house was considered when estimating FMV.
Exceptions to sales tax
Most states do not require you to report your home sale, or pay sales tax on it. Some exemptions exist for certain types of homes or sellers. However, even if an exemption applies to you, most state taxing authorities will still ask how much taxes you paid in relation to the house so that they can apply this additional money towards paying your total liability.
Some examples of these exceptions are when you sell your primary residence, when you live in the property as your principal place of residence, or when you use the property for business purposes. A seller may be able to claim “use” as a personal vehicle if he/she takes the car to work every day.
These things must be true at the time of the sale, however, so make sure to check with our experts before reporting! They can help you determine whether you qualify under any of these. We also can tell you what forms to fill out and where to send those documents.
Inventory sales
Another common way that most states assess tax is on what’s called an inventory sale. When you sell your home, state laws require you to report it as such in property records.
This is where people often get confused. Because when they list their house, they also include the cost of materials and labor to improve the property or even just to make it look better.
These costs are not considered income because they don’t go towards changing the overall value of the property. They are typically excluded from the selling price when calculating how much tax you owe.
But if you keep those materials and/or renovations under $100 per item, then that amount is exempt from taxation. A small refrigerator may be worth less than $100, for example.
Resale licenses
There are two main types of resales you can do in this country- residential sales and commercial sales. With regards to residence selling, there is what is called “residential sale tax” or RESTA. This is typically referred to as state transfer tax or STT. States determine how much tax they want to charge sellers on their homes so that it becomes more expensive to sell your house!
The other type of resale is for business purposes, which does not have any kind of resale license or exemption. Businesses that include real estate brokerage, buying and selling houses, or owning a property themselves usually use professional services to handle all the paperwork and legalities of the transaction.
These professionals are usually paid using either an hourly basis or per transaction fees, but most commonly some sort of combination of both. These fees are also variable depending on the seller, buyer, and size of the deal.
Credit for tax paid to another state
States do not directly collect sales tax on online purchases, so they have collection agencies that work with other states’ governments to get this tax collected.
A common way these agency partners are funded is through a system of credit given to your home state when you purchase goods in another state. This credit can be applied towards your own state’s income taxes or if you live in another country, it can go towards paying foreign income taxes there.
These credits vary by state but most give you at least one year to use them before requiring payment. Some require you to report your business income as self-employed which depends on how your seller classifies you while filing your personal taxes.
There are some tricky rules about using these credits where you must keep accurate records and cannot simply claim it on your yearly return. But overall, selling online makes collecting sales tax much easier because you don’t need to worry about shipping it somewhere yourself.
Closing costs
One of the biggest expenses in any real estate transaction is closing costs, or things like legal documents and fees to register your property as sold, pay off loans on the house, and transfer ownership.
These are usually done at one location while the seller remains there until everything is finished. Because of this, sellers’ tax bills are adjusted when calculating their personal income taxes.
Real estate agents help you sort out these costs, but only if you ask! Most times they take care of it for you, so make sure to check. But if you want to know how much it cost, you must ask.
Closing costs include some very specific items such as title searches, broker’s commissions, and other regulatory fees. These can add up quickly depending on the number of transactions being closed at once.
Because of this, most states have laws that require individual taxpayers to report all of their gross sales on their tax returns. After deductions for mortgage interest, home office use, etc., what’s left over is considered net sale proceeds.
This means that each person has to calculate the amount of money left over after paying taxes themselves before reporting the final total on their return.
