Your Home Sale and Capital Gains

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Let's start with the basics: What is capital gains tax? It is a type of tax on profits earned from the sale of assets like stock or real estate. When these are sold for more than they cost to purchase, the IRS taxes the gain.

In real estate, capital gains are calculated by taking the final total sale price of the house and deducting its original cost. However, the tax on that gain is calculated with additional considerations:

• How long you owned the house
• Any fees you've paid — escrow, recording and appraisal fees, brokers' commissions
• Your income tax bracket
• Your marital status

If you've owned your house for less than a year, then the capital gains are considered short term. In this case, taxes are paid at the same rate you'd pay for ordinary income (such as wages from your job). If you owned your home for more than a year, the capital gains are considered long term. In 2024, the rates for long-term capital gains are 0%, 15% or 20%; which rate you pay depends on your income level. All are typically lower than ordinary income tax rates.

You'll also pay state taxes on your capital gains unless you live in a state that has no income tax (though New Hampshire, which has no income tax, does tax investment income).

Exclusions

It's likely that you've owned your home for more than a year, so you will probably be subject to long-term capital gains rates. However, you may be able to avoid some of the tax because real estate gains are subject to different rules than investment capital gains. These rules apply only to your primary residence, though; if the home you sold was a second property — an investment, vacation or rental home — and you never converted it to your primary property, you are not eligible for capital gains tax exclusions.

For most of the following exemptions, you will need to have owned and lived in the house for two of the five years preceding the sale:

• You might be able to defer capital gains if, after you sell your property, you apply your profits to the purchase of a new property within 180 days.
• You might be able to take advantage of a capital gains tax exclusion that applies to your primary residence once every two years. Exemptions are $250,000 if single and $500,000 for couples filing jointly. (Some widowed individuals may be eligible for the $500,000 exemption.)
  Itemized construction expenses can be added to the cost basis of your house, thereby helping decrease your tax liability. Improvements must be considered major — adding a new bedroom, renovating a kitchen or bathroom, installing a roof — and must be documented; estimates won't work. (For examples of other home improvements, see IRS Publication 523, Selling Your Home.)
• Selling costs like real estate agent fees and closing costs can be deducted from the sale proceeds to reduce your capital gain.
• You might qualify for a partial exclusion if you sold your home as the result of an unforeseen circumstance — for example, if you moved for work, had a health complication, faced divorce or marital separation, suffered the death of your spouse or incurred a loss from a natural disaster. You may also qualify for a partial exclusion if you came to serve in the uniformed services, foreign service or intelligence services.
  

You may be like many homeowners who've experienced significant capital gains since you purchased your home, but you can manage the tax liability and keep more of the profit in your pocket. Consult a tax professional to determine all the tax implications of selling your home.

 

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