Buying a home is a type of investment because, in the long run, your house begins to go up in value. So, if you’ve been a homeowner for a while, then your house has probably gone up in value too and you’ve been able to earn some equity on the house. Equity is what you get when you subtract what you owe on the house from the current value of the home.
So, do you have to pay taxes on equity when you sell your home? This article will explain when home equity is taxable and how to tap into your equity in subsequent paragraphs:
When Home Equity Becomes Taxable
You can’t pay tax on your home equity if you haven’t tapped it. You’ll only be required to pay tax on your home equity after selling your property. If this happens, the tax you’ll be required to pay will depend on several situations.
For a Primary Home
If your main residence meets certain criteria, you’ll be able to exempt some amount of equity as being taxed as gain. The exclusion limit is different among the single and married respectively. If you’re single, you won’t be required to pay capital gain tax on $250,000 of your home equity and $500,000 if you’re married.
For Other Properties
The amount you’ll be required to pay in tax on your other properties will depend on your situation. Tax laws can be complex, hence you may need to seek professional help when calculating how much tax to pay on your other properties. However, you may be required to pay short-term capital gains tax on a property you’ve owned for less than a year. And you’ll be required to pay long-term capital gain tax on property you’ve owned for more than a year.
How To Tap Home Equity Without Taxable Income
There are ways you can tap into your home equity without having to pay taxes or sell your home. They include:
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Home Equity Loan
Home equity loans are an option to withdraw equity without refinancing. Home equity loans are a type of mortgage that allows you to obtain a loan against the equity in your property. You’ll receive the loan in full and be required to pay it back in installments.
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Refinancing
You can also tap into your home equity without paying any taxes through refinancing. Through refinancing, you can pay off your old mortgage for a new one; however, note that using a cash-out refinance can change your mortgage payment if you’re taking on extra debt.
Home Equity Line of Credit
A home equity line of credit (HELOC) works like a credit card; you have a line of credit that you can use to make purchases. You’ll only pay interest on the amount used. However, with HELOC, you have a specific draw period where you’ll make interest-only payments. After the draw period, you’ll need to pay back the principal and any interest it has gathered.
How much of your home equity can you borrow through a loan or HELOC?
Your credit history determines how much you’re able to borrow. Many lenders will check your income and the value of your home before giving you a loan. And you may not be able to borrow more than 80% of the total value of your home.
Conclusion
You can tap into your home equity without having to pay taxes when you sell your home. This article has explained how you can tap into your home equity; leverage this and you won’t have to pay tax on a home equity loan. Alternatively, you can sell your house to a cash house buyer to make more profit on the sale of your house.
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