Capital Gains Tax Selling House – So you sold your house and left the last attorney’s office with a fat check. Not just a big check – but the biggest check you’ve ever had in your sweatshop.
. And capital gains are taxed at different rates depending on whether your investment is short-term (less than one year) or long-term (over one year). The rates also vary depending on your income.
Capital Gains Tax Selling House
But, hey, don’t lose hope just yet. The great news about selling a home is that the profit is often exempt from capital gains taxes. That’s right! Tax free, baby. But just like anything tax-related, there are some hoops to jump through.
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Okay, so here’s the deal. If the house you sold was your main residence for at least two of the last five years, you don’t have to pay capital gains taxes on your profit up to a certain amount. And the IRS is pretty generous (for once!) about how much profit to exclude from taxes.
If you are single, any profit up to $250,000 is excluded from taxes. For married filing jointly, the amount doubles to $500,000.1 And profit doesn’t simply mean how much money you got when you sold your home. And that’s a relief since that check you get at closing could be much larger than what’s considered a profit – especially if you’ve been working hard to pay for your home.
Profit is the selling price less the original purchase price and the cost of improvements, fees and commissions. Now if the housing market in your area is down, and you’ve cashed in on the sale of your home, you only pay taxes on the amount above the $250,000 or $500,000 threshold.
Let’s look at an example. Say you and your spouse bought a house 10 years ago for $300,000 in an up-and-coming part of town. You followed our recommendations and put down 20% ($60,000) and got a 15 year fixed rate mortgage. After 10 years of payments, you only owed $93,000 when you decided to sell. Home values in your area have increased like crazy, so you were able to sell your home for $900,000! Boom! You couldn’t stop smiling for a week.
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So to figure out your profit, you take $900,000 and subtract the original sales price of $300,000, about $55,000 in commissions and fees and say $20,000 in home repairs (new roof and furnace). That’s a profit of $525,000. Since the tax-free threshold for married couples is $500,000, you will pay capital gains taxes on only $25,000.
So, $525,000 is a big pile of money, but since you only owed $93,000 on your house, you actually walked away with $752,000. Here’s the math: $900,000 (sale price) – $55, 000 (commissions and fees) – $93, 000 (mortgage payment) = $752, 000.
Now to your tax bill. Short-term capital gains (less than one year) are taxed at your normal income tax rate. Long-term capital gains (more than one year) are taxed based on your income. If your taxable income is less than $41,675 for single filers or $83,350 for married filing, your long-term capital gains tax rate is 0%!
The long-term capital gains rate is 15% for single filers with taxable income between $41,676 and $459,750 and for couples filing jointly with income between $83,351 and $517,200.
Capital Gains Tax Exemptions
That means that a good number of people, depending on whether they are single or married, fall into the 15% bucket (or are on the borderline).
Let’s go back to our example, where your taxable profit was $25,000. Assuming your household income falls into the 15% capital gains bracket, you will owe $3,750 in taxes. Yes, that’s a lot of money, but when you consider that you got $752,000 from the sale of your home, it’s small potatoes.
If you’ve met the two-year residency requirement, meaning your home has been your primary residence for at least two of the past five years (and you’ve got the random carpet stains to prove it), you probably won’t capital gains taxes hit you. when you sell your house because the profit threshold ($250,000 to $500,000) is so high.
But if you made a profit on a house you lived in for less than two years, the Taxman will be calling. And it could hit you with a big bill! Whether you fix up and flip houses or you’ve decided to move to a new neighborhood, if you don’t meet the residency requirement, your profit will be taxed at either your ordinary income tax rate (if you’ve owned the house for more less than a year) or the capital gains rate (if you owned the house for a year).
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There are several ways to avoid the capital gains tax, but the main one is to stay on point! Don’t sell your home before you’ve owned it for two years.
The IRS also has a partial exclusion if you sold your home due to a job relocation, a health issue that required you to be closer to a family member’s medical facilities, or to provide personal care for an ill family member .8 A partial exclusion is calculated based on how long you have lived in the home.
So, if you’re single and live in your home for a year (half of the two-year residency requirement), you qualify for 50% of the $250,000 exclusion. That’s $125,000. As you get closer for the two-year requirement, the amount you can exclude will increase.
If you don’t qualify for an exclusion, your best bet to lower your tax bill (at least a little) is to create an itemized list of all the improvements you’ve made to your home so you can deduct them from your profit. You bought a new hot water heater? Replace the windows? You can deduct those costs from your profit.
Tax Implications Of Selling A House
The real estate market is crazy right now, with house prices in many cities increasing by double-digit percentages last year. That means you could be hit with a big tax bill if you decide to sell your home before you meet the two-year requirement. But in a normal market, if you sell a home after owning it for less than two years, most (if any) of your profit will be consumed by real estate agent fees (typically 6% of the sales price) and closing costs. The longer you stay in your home, the more equity you earn (equity is how much your home is worth, minus how much you owe on it).
If you own a rental property, the rent you collect is considered regular income, and you’ll pay taxes on it like a regular paycheck. But if you decide to sell the property, you will face capital gains taxes on your profit. And because rent is not your primary residence, you won’t be able to exclude part of your profit.
So if you’ve held the property for less than a year, you’ll pay short-term capital gains taxes at your ordinary income tax rate. If you owned the property for a year, you will pay long-term capital gains taxes at a rate of 0%, 15% or 20% depending on your income. (We talked about those income ranges earlier.)
Just like selling a primary residence, you can deduct the cost of improvements, real estate commissions and closing costs from the gain you earned on your rental property. That will reduce your tax burden, but the best way to avoid capital gains taxes is to do a 1031 exchange. Ugh, the IRS and their numbered forms. But hang with us. This will be worth it.
Capital Gains Tax Calculator & Real Estate 1031 Exchange
An in-kind 1031 exchange allows you to defer capital gains taxes if you reinvest the proceeds from the sale of a property in another similar property. That’s right: If you sell a rental home and buy another home with the money you made from that sale, you won’t have to pay capital gains taxes on the sale. The IRS allows you to do as many 1031 exchanges as you want, but once you stop investing your proceeds in similar properties, you will have to pay capital gains taxes.
The IRS is somewhat flexible about the term “like.” For example, you could sell a rental home and buy commercial property or an apartment complex and defer capital gains taxes. But you couldn’t sell a house and invest the money in mutual funds or some other investment like cryptocurrency (crypto is not a good idea anyway). Well, you could. You will only have to pay taxes on it.
The IRS has a few rules regarding 1031 exchanges though. First, you need to identify the new property you want to buy within 45 days.9 (That means you need to shop for another property ASAP.) Second, you have to sell to be closed within 180 days. pressure – especially if you’re the type who takes three hours to make a simple decision like which movie to watch. So the key is to plan ahead!
A 1031 exchange is kind
Capital Gains Tax On A Home Sale, Property Or Real Estate (and How To Avoid)
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