When you receive a notice from your county property tax assessor that your home’s been reassessed, you can count on your property tax bill adjusting along with it. If you’re worried that the reassessment may trigger a capital gains tax bill, don’t sweat it: Property and gains taxes are two completely independent taxes, and assessments don’t impact gains calculations in any way.
Property Tax Basics
State and local governments assess property taxes against homeowners and other property owners based on the current market value of their home. To figure tax bills, tax agencies assess a home’s value -- often the home’s purchase price when you buy it -- and periodically reassess properties to ensure assessed values represent current market values. When you receive a reassessment, it’s a notice that your property’s official value has changed for property tax purposes only. The property tax rate is then multiplied by your home’s value, less any exemptions, to determine your latest property tax bill.
Capital Gains Tax Basics
It’s easiest to think about capital gains as taxes on profits from financial deals: Whenever you sell an item such as property for more than its purchase price, you’ve created a capital gain. The Internal Revenue Service then taxes any amount of profit you receive, or gain, in the transaction, and the entire proceeds of your sale aren’t taxable. For example, if you purchase an investment property for $100,000 and sell it for $102,000, you’ll owe gains taxes only on the $2,000 you pocketed through the transaction. Gains rates vary by your tax bracket and how long you owned something before flipping it for a profit. You don’t owe capital gains until you sell an asset, so if your home’s value increases while you’re living in it, it won’t have immediate gains-tax consequences.
When you get around to selling your home is the only time you’ll need to worry about capital gains. First, you’ll need to determine your home’s basis, which is the price you paid for it plus the cost of any improvements as well as any selling costs such as realtor charges or listing fees. Subtract the home’s basis from its sales price, and you’ve determined the amount for which you’ll need to pay gains taxes. Any property tax reassessments you received while you owned your home aren’t factored into this calculation in any way.
If you’re selling your main home, you may be able to exclude a big hunk of your profits from gains tax. If you’ve owned the home for at least two years and used it as your primary residence for at least two of the past five years, the IRS allows you to exclude $250,000, or $500,000 if you file a joint return, from gains. For example, Steve and Liz purchased their home for $30,000 and lived in it for 25 years before selling it for $540,000. They have a capital gain of $510,000 on the home, but apply the $500,000 exclusion as a married couple. They’ll owe long-term gains taxes on only the $10,000 that exceeds the exclusion to the IRS, as well as any additional property taxes due before they sold the home.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.