Posted by Ronald J. Fichera Jun 29, 2023
(PA-DoR), the state does not define capital gains or make any provisions specifically defining long-term or short-term capital gains. All gains realized from selling, exchanging, or disposing of any type of property are taxed according to the Pennsylvania Personal Income Tax (PA PIT) system, meaning they are taxed as personal income.
According to the PA-DoR's Personal Income Tax portal, is a flat 3.07%. Capital gains realized from the sale of a home is one of the state's eight defined income classes: “Net gains or income from the dispositions of property.”
Individuals looking to sell real estate property in Pennsylvania must pay taxes on four levels: federal capital gains taxes, state-level personal income taxes, state-level transfer taxes, and municipality transfer taxes.
Rate: Varies from 0% to 28%. The most common rate is 15%.
When selling real estate in Pennsylvania, you must pay federal capital gains tax. short-term and long-term. If you own the property for one year or less before selling, it is a short-term capital gain. If you've held it for over a year, it's long-term.
Long-term capital gains tax brackets are calculated based on the seller's filing status and income levels:
outlines exceptions to the long-term capital gains taxes. Sellers can exclude up to $250,000 (or $500,000 for married couples filing jointly) on the gains realized following the sale of their home if they pass the “ ” You qualify for this exclusion if:
According to the National Association of Realtors, the median period of homeownership in the United States is 13 years. While the exact duration varies by area, it typically falls between 6 and 21 years. These stats show that most individuals selling a home in the United States will pay long-term federal capital gains taxes.
Example: Aaron is a single taxpayer earning $100,000 annually. He owned and lived in a single-family home in Allentown, PA, which he bought for $200,000, then used as a primary residence for five consecutive years before deciding to sell his property. When he sold it, the final sale price was $285,000, meaning Aaron realized $85,000 of capital gains. Due to the length of homeownership, the IRS categorizes these gains as long-term.
Typically, his filing status and taxable income would place him in the 15% tax bracket and require him to pay $12,750 in federal capital gains tax. However, IRC Paragraph 121 allows him to exclude up to $250,000 on the gains he realized from the tax because his property passes the ownership and use tests. The capital gains do not exceed the $250,000 threshold, allowing him to exclude 100% of his gains and sell his house without paying federal capital gains taxes.
Pennsylvania taxes capital gains as personal income. Due to the Keystone State levying a flat income tax rate of 3.07%, there is only one tax bracket.
How is the Pennsylvania state capital gains tax calculated?
Example: When Aaron sold his house and earned $85,000 of capital gains on the sale, the state considers him to have earned an additional $85,000 on top of his regular annual income of $100,000. Pennsylvania will therefore tax him as though he earned $185,000. At the state's flat income tax rate of 3.07%, Aaron will pay $5,679.50 in state income taxes.
Rate: 1% of the property's value at the time of the sale.
According to PA-DoR, the Realty Transfer Tax applies to the transfer of any real estate property, whether by deed, instrument, long-term lease, or any other agreement, with few exceptions listed in the law.
The RTT is equal to 1% of the property's value at the time of the sale.
Tax liability is shared between the person transferring the property (the grantor) and the person receiving the property (the grantee). While it is not a legal requirement in state law, it is common for both parties to split the taxes evenly.
How is the Pennsylvania state transfer tax calculated?
When selling a home in Pennsylvania, both the person selling the property and the new owner must pay the Realty Transfer Tax to the state. The most common arrangement is for both parties to split the costs evenly, meaning the grantor pays 50% of the RTT, whereas the grantee pays the remaining 50%.
Example: Aaron sold his Allentown, PA, house to Brianna, another Pennsylvania resident. Due to the property's final sale price being $285,000, the Realty Tax Transfer owed to the state is $2,850. Aaron and Brianna agree to split the costs evenly, meaning Aaron pays $1,425 and Brianna pays the remaining $1,425 in state transfer taxes.
Rate: 1% in most counties
Besides the state of Pennsylvania, local governments in Pennsylvania also levy local-level Realty Transfer Taxes. These taxes are typically split between the local government and the corresponding school district.
For example, residents of Bellefonte, PA, selling real estate property in the town must pay RTTs to the Centre County government and the local school district, the Bellefonte Area School District.
Each county, township, municipality, and city borough can impose its own rates. The best way to determine your local government's Realty Transfer Tax rates is to visit the county's website and check the local RTT rate tables. The most common local RTT rate is 1% on the property's final sale or transfer price, split evenly between the local municipality and the local school district.
As with state transfer taxes, both the grantor and the grantee are held jointly liable for payment of the tax. The most common arrangement is to split the taxes evenly.
How are Pennsylvania local transfer taxes calculated?
Local government entities in Pennsylvania calculate their local-level real estate transfer taxes according to the property's final sale price, similar to the state government.
Example: Allentown, PA, is located in Lehigh County. According to the Lehigh County Recorder of Deeds website, the local government levies a combined local-level Realty Transfer Tax of 1%, including 0.5% to the Allentown municipality and 0.5% to the Allentown School District.
When Aaron transferred his Allentown home to Brianna for a purchase price of $285,000, the law required both to pay local-level Realty Transfer Taxes to Lehigh County. The total amount owed to the local government is $2,850. As with state taxes, Aaron and Brianna agree to split the costs evenly, meaning both parties pay $1,425 each in local transfer taxes.
Excluded parties include the following:
Transfers of real estate property to the federal or state government or any of its subdivisions, agencies, or instrumentalities may be exempt from the Realty Transfer Tax if the property is:
Per 61 PA Code 91.193(b)(6), transfers of real estate property are exempt from the Realty Transfer Tax if done between certain family members under specific conditions.
Eligible family members include:
If a property owner dies, the law exempts transfers from the RTT if there is no or nominal consideration (e.g., $1) and if the transfer is from the deceased owner's representative to a designated heir or devisee.
The law applies to both testate successions, meaning a will is in place, and intestate ones, meaning no will existed at the time of death.
Pennsylvania law exempts real estate transfers from the Realty Transfer Tax if it comes from or goes to a trustee of an ordinary trust.
Specific types of transfers of real estate property to and from corporate entities are exempt from the RTT:
Transfers of real estate property involving religious organizations are exempt from the RTT if they meet both of the following conditions:
If the total value of the interest in the real estate property at the time of the sale is $100 or less, Pennsylvania law exempts the transfer of such property from the RTT.
Transfers of real estate property deeds to burial sites are exempt from paying the Realty Transfer Tax if the deed conveys a right to sepulcher or erect monuments without conveying the title to the land.
Compared to other states, Pennsylvania's combined real estate taxes, including capital gains and transfer taxes, are lower than the average, ranking among the lowest nationwide. Below is a breakdown of how real estate taxes in Pennsylvania compare to their equivalents in other states.
When selling a home in the State of new York any capital gains realized on the sale are treated as income, and any property transfer from one taxable party to another is taxed. The state makes no distinction between short-term or long-term capital gains, making it similar to Pennsylvania. Instead, the Empire State uses a multi-tiered system to calculate taxes owed.
Capital Gains Tax Rate: Taxed as income, 4%-10.9%
Because capital gains are treated as income, New York taxes sellers using its three-tiered system, which includes fixed tax tables, tax rate schedules, and tax computation calculators. While the exact amount of taxes owed depends on the seller's taxable income and filing status, the rates in the range from 4% to 10.9%.
Transfer Tax Rate: 0.4% + 1% of the property's sale price if over $1 million
New York state law uses two transfer taxes: a base rate calculated for all transfers and an additional tax that only applies to high-value properties known as the mansion tax. The base rate taxes in the final consideration amount, making it approximately equivalent to 0.4%. The mansion tax is levied on top of the base rate and is 1% of the property's final sale price.
Florida is one of the less expensive states for real estate investments due to its relatively lax real estate taxation system.
Capital Gains Tax Rate: 0%
Transfer Tax Rate: 0.70% in most counties, 0.65%-1.15% in Miami-Dade County
An exception applies to Miami-Dade County, which levies 60 cents per $100 plus a surtax of 45 cents per $100 for any property that isn't a single-family dwelling.
While Illinois tax legislation imposes both capital gains and transfer taxes, the combined tax rates are close to the national average.
Capital Gains Tax Rate: 4.95%
Transfer Tax Rate: 1% levied by the state + 0.50% levied by the county + variable municipal taxes
Illinois taxes property transfers on multiple layers: state-level, county-level, and municipal-level. According to Illinois law , state-level transfer tax is $0.50 per $500, or about 1%, whereas the county-level transfer tax is $0.25 per $500, equivalent to 0.5%. Municipal-level transfer taxes vary from locality to locality: some impose no taxes, some impose flat fees, and others impose tax rates that may reach up to $10 per $1,000 (1%) or more.
Individuals who have realized capital gains must report them on their tax returns.
According to the Pennsylvania Department of Revenue (PA-DoR), the state does not make specific provisions for capital gains, including short-term or long-term gains. All capital gains, regardless of whether they are short-term or long-term, are taxed as income.
If you plan to sell a home, you can take advantage of specific strategies to help you reduce or eliminate capital gains taxes and reduce your closing costs in Pennsylvania.
According to the IRS, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the gains realized from the sale of a home, provided the home was your primary residence. You can prove your home was a primary residence by passing the , which require you to pass the following:
Although it is not required for the ownership and usage periods to be consecutive, you must be able to prove both ownership and use of the home within five years of the sale. Additionally, you must not have used this exclusion for another home in the last two years.
Example: As a single taxpayer selling his primary residence in Pennsylvania, Aaron may be able to exclude up to $250,000 of capital gains from the sale of his home. To pass the use test and verify occupancy, he provided copies of his utility bills for the past two years, proving he's lived at this address for the period required by the law.
The documents Aaron provided allow him to pass the ownership and use tests and exclude up to $250,000 of capital gains from federal capital gains taxes.
Pennsylvania law allows certain individuals to exclude all gains realized on the sale of a home if the seller can prove they used the home as a primary residence and pass specific conditions. This exclusion allows the seller to avoid reporting capital gains as income and avoid state-level income taxes on the sale of a home in Pennsylvania.
Individuals selling a home in Pennsylvania qualify for this exclusion if all of the following conditions are met:
Additionally, one of the two conditions below must apply:
Example: Aaron lived at his primary residence in Pennsylvania for over nine years before selling it. Because he passed the federal-level ownership and use tests, he also qualified for the state-level exclusions.
He did not own any other property at the time of the sale and did not use the state-level exclusion for another house, allowing him to benefit from the state-level exclusion. Consequently, Aaron does not pay any income taxes on the capital gains realized with the sale of his home.
How to Report Your Property Sale for Taxes in Pennsylvania
Reporting the sale of a property for taxes requires you to complete specific forms and documents, including both federal and state-level forms.
Form 8949 requires you to report whether your gains are long-term or short-term. Short-term gains must be listed under Part I, whereas long-term gains must be listed in Part II. If you can exclude the gains you've realized with a specific property, enter the letter code “H” in column (f) on the line corresponding to that property, then write the corresponding adjustment amount in parentheses and as a negative in column (g).
After completing Form 8949, enter the corresponding information regarding short-term and long-term gains in IRS Schedule D (Form 1040). Part I lets you enter short-term gains, whereas Part II is for long-term gains.
To report gains realized on the sale of a property, you'll need to fill in the fifth income category, titled “Net Gain or Loss from the Sale, Exchange, or Disposition of Property.” Enter the total amount of gains realized in Field 5. If you realized a loss that year, check the “LOSS” box, then enter the amount corresponding to your losses.
This article was provided by Lana Dolyna, EA, CTC, Senior Tax Advisor, and originally appeared on TaxSharkInc.com and brought to you by the , where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, today!
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