If you sell your home for a profit, some of the capital gain could be taxable. Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income.
The IRS and many states assess capital gains taxes on the difference (profit) between what you pay for an asset — your cost basis — and what you sell it for. Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets like cars, boats and real estate.
To minimize your tax burden, the IRS typically allows you to exclude up to:
- $250,000 of capital gains on your primary residence if you’re single.
- $500,000 of capital gains on real estate if you’re married and filing jointly.
You will have to meet certain criteria in order to qualify for this exclusion, so be sure to review them before you sell. You might qualify for an exception, and adding the value of home improvements you’ve made could help.
For example, if you bought a home 10 years ago for $200,000 and sold it today for $800,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be), according to NerdWallet.com. What rate you pay on the other $100,000 would depend in part on your income and your tax-filing status.
The bad news about capital gains on real estate is that your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:
- The house wasn’t your principal residence.
- You owned the property for less than two years in the five-year period before you sold it.
- You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)
- You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
- You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.
- You are subject to expatriate tax.
If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.
- Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket.
- Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.
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