April 06, 20247-minute read
Author: Miranda Crace
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As a homeowner, you’ll have to pay taxes related to your property from the time you buy the house all the way through the home sale. One of the taxes you’ll consider when selling your home is the capital gains tax. Capital gains tax may not be the most exciting part of selling your home, but it’s important to know how it’ll impact your sale. Let’s take a closer look at the capital gains tax, including what it means and how you can reduce your tax burden when you sell your home.
What Is The Capital Gains Tax On Real Estate?
The capital gains tax is what you pay on an asset’s appreciation during the time that you owned it. The amount of the tax depends on your income, your tax filing status and the length of time that you owned the asset. The capital gains tax can apply to any type of asset that increases in value. Most people encounter this tax when they sell their primary residence. You may be subject to the capital gains tax if your home’s sale price is more than what you initially paid for it. You pay the capital gains tax the same year that you sell your house; when you file your tax return.
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How Do Capital Gains Taxes Work?
You may be required to pay the capital gains tax on the amount you profit from selling your home. Let’s take a look at an example. Let’s say you bought your home for $150,000 and you sold it for $200,000. Your profit, $50,000 (the difference between the two prices), is your capital gain – and it may be subject to the tax. If you’re selling your primary residence, you may be able to avoid paying the capital gains tax on the first $250,000 gain if you’re a single tax filer and $500,000 for married couples filing jointly.
You only pay the capital gains tax after you sell an asset. Let’s say you bought your home 2 years ago and it’s increased in value by $10,000. You don’t need to pay the tax until you sell the home.
Capital Gains Tax And Capital Home Improvements
In the above example, your home’s purchase price is your cost basis in the property. Now, let’s assume that you spent $50,000 on a kitchen renovation.
This is considered a capital improvement because the renovation increases the overall value of your home. So, your cost basis is now $200,000. That’s $150,000 (the original purchase price) + $50,000 (the amount spent on the capital improvement).
If you sell your home after the renovation for $200,000, your profit is $0, so there’s no capital gains tax.
What Is The Capital Gains Tax Rate?
Your capital gains tax rate will depend on your current income tax bracket, the length of time you’ve held the asset and whether the property was your primary residence. We’ll look at that below. It’s also important to know the type of asset you’re dealing with. While most long-term capital gains are taxed at rates of up to 20% based on income, there are situations in which higher rates apply. The following table includes types of assets and their respective capital gains tax rates.Special Asset Classes For Long-Term Capital Gains Tax
Asset Type | Capital Gains Tax Rate |
Taxable part of gain from qualified small business stock sale under section 1202 | 28% |
Collectibles (such as art, coins, comics) | 28% |
Unrecaptured gain under section 1250 for real property (applies in certain cases where depreciation was previously reported) | 25% |
There are special rules that apply for gifts of property or inherited property, patents or certain types of investment income like commodity futures. For tax purposes, these dates are calculated from the day after the original purchase to the date of sale of the property.
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Short-Term Vs. Long-Term Capital Gains Tax
When you start to think about selling a capital asset for a gain or a loss, the first thing you need to ask yourself is “When did I buy this?” Capital gains and losses can be short- and long-term, and it’s important to understand the difference between the two. If you purchased the capital asset less than a year ago, you’re dealing with a short-term capital gain or loss, and it will be treated as ordinary income. If the purchase took place more than a year ago, that’s a long-term capital gain, which will be given preferential tax treatment, and – if it’s your primary residence – it may even be exempted. Keep in mind that there are exceptions for property that’s gifted or inherited. Review Publication 544 from the Internal Revenue Service (IRS) for more information about these exceptions.
Short-Term Capital Gains Tax: Explained
If you’ve made the determination based on the rules mentioned above that short-term capital gains tax applies in your situation, the profit is taxed at regular income tax rates. For the 2024 tax season, these rates are as follows:Short-Term Capital Gains Tax Rates For 2024
Tax Rate | Single | Married Filing Jointly and Surviving Spouses | Married Filing Separately | Head of Household |
10% | $0 – $11,600 | $0 – $23,200 | $0 – $11,600 | $0 – $16,550 |
12% | $11,601 – $47,150 | $23,201 – $94,300 | $11,601 – $47,150 | $16,551 – $63,100 |
22% | $47,151 – $100,525 | $94,301 – $201,050 | $47,151 – $100,525 | $63,101 – $100,500 |
24% | $100,526 – $191,950 | $201,051 – $383,900 | $100,526 – $191,950 | $100,501 – $191,950 |
32% | $191,951 – $243,725 | $383,901 – $487,450 | $191,951 – $243,725 | $191,951 – $243,700 |
35% | $243,726 – $609,350 | $487,451 – $731,200 | $243,726 – $365,600 | $243,701 – $609,350 |
37% | $609,351 or more | $731,201 or more | $365,601 or more | $609,350 or more |
Tax rates work slightly differently if you happen to be declaring a short-term capital gain sold by an estate or trust.Short-Term Capital Gains Tax For Estates Or Trusts
Tax Rate | Estimate or Trust Income |
10% | $0 – $3,100 |
24% | $3,101 – $11,150 |
35% | $11,151 – $15,200 |
37% | Over $15,201 |
Your home is considered a short-term investment if you own it for less than a year before you sell it. There are no special tax considerations for capital gains made on short-term investments. Instead, the government counts any gain you made on the home as part of your standard income. This can sometimes present a problem for certain short-term buyers, like house flippers. For example, let’s say you earn a profit of $50,000 from flipping a home within 1 year. You also earn an annual salary of $50,000 from your regular job. Under these circ*mstances, the $50,000 you earned from the sale of the house essentially doubles your income. When you file your federal taxes, the IRS would consider your gross income for that year to be $100,000. You can minimize your tax burdens with short-term sales by carefully accounting for all of your expenses and tax deductions.
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Long-Term Capital Gains Tax: Explained
Owning your home for more than a year means you pay the long-term capital gains tax. After 2 years, you’ll qualify for the personal exemption – more on that below. Unlike the seven short-term federal tax brackets, there are only three capital gains tax brackets. The long-term capital gains tax rates are much lower than the corresponding tax rates for standard income. You may not need to pay the tax at all if you make less than the minimum amount listed below. The percentage you pay on your capital gains depends on your filing status and how much money you made last year. Here are the rates for taxpayers filing in 2024. Long-Term Capital Gains Tax Rates For 2024
Tax Rate | Single | Married Filing Jointly and Surviving Spouse | Married Filing Separately | Head of Household | Trusts and Estates |
0% | Up to $44,625 | Up to $89,250 | Up to $44,625 | Up to $59,750 | Up to $3,150 |
15% | $44,625 – $492,300 | $89,250 – $553,850 | $44,625 – $276,900 | $59,750 – $523,050 | $3,150 – $15,450 |
20% | $492,300 or more | $553,850 or more | $276,900 or more | $523,050 or more | More than $15,450 |
How To Navigate Capital Gains Taxes On An Investment Property
You can try to minimize your tax burden by selling the home strategically if you have an investment property. The capital gains exemption on homes doesn’t have a counterpart in the investment property realm. Many real estate investors engage in 1031 (like-kind) exchanges. In a 1031 exchange, a real estate investor sells their current property, but then rolls the proceeds into a new investment opportunity and postpones their capital gains taxes indefinitely. Another alternative available to longtime real estate investors with large capital gains tax liabilities is to transfer those assets into an opportunity zone. Investors can then enjoy a step up in basis after 5 years. After 10 years, the gains become tax-free. Just as individual homeowners might choose to sell their home when their income is at a low ebb, businesses may want to offset capital gains with capital losses. When you sell your asset for less than your adjusted basis, the IRS considers that a capital loss. You can also deduct any repairs or renovations you made to an investment property to improve the final selling price of the home. Remember to keep documentation such as mortgage statements, bills, deeds of sale, credit card statements and other similar papers to prove how much you spent. These documents will be important if you’re audited.Reinvest Sale Proceeds
Offset Capital Gains With Capital Losses
Deduct The Costs Incurred By The Sale
Real Estate Capital Gains Tax FAQs
To learn more about the capital gains tax on real estate properties, review the following frequently asked questions. The amount you pay in capital gains tax can vary and depends on your income, tax filing status, the amount of time that you’ve owned your property and whether the house is your primary residence. The amount you end up with as a profit after selling your property is the capital gain that will be taxed. If you’re required to pay the capital gains tax, you pay it when you sell your property. Be sure to check the IRS requirements for paying the capital gains tax to determine when you have to pay and if you’re eligible for an exemption. If you’ve owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly. Visit the IRS website to review additional rules that may help you qualify for the capital gains tax exemption. Because rental properties and second homes are considered assets, you may be subject to pay the capital gains tax. However, there are also ways to avoid paying the tax on these property types, especially if they’ve increased in value in recent years.How much is capital gains tax on real estate?
When do I pay the capital gains tax on real estate?
How do I avoid the capital gains tax on real estate?
Do I have to pay the capital gains tax if I sell a second home or rental property?
The Bottom Line: Understanding Capital Gains Taxes On Real Estate Is Important
No matter which type of property you decide to sell, take careful note of how much money you spend finding and securing a buyer. From marketing expenses to closing costs paid by the seller (like real estate agent fees), you can deduct these costs from your taxes, though you should speak to a tax advisor for further insight. Looking for other real estate tax tips? Learn more about the top tax benefits of real estate investing.
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