If you are planning to sell your house at any point in the future, it is important you know about capital gains tax.
First off, you need to know what a capital asset is. These are substantial pieces of property you own such as homes, cars, stocks, bonds, and more.
When you sell one of these assets, you may have to pay income tax on the profit you gain.
Here is what you need to know as a potential home seller:
Short-term and long-term capital gains
If you sell your property in a year or less of owning it, you will have a short-term capital gain.
Short-term gains receive no special tax considerations. The profit you make on a short-term investment will be counted as part of your standard income.
If you sell it after a year of owning it, you will have a long-term capital gain. This means you may have more favorable capital gains tax rates.
Primary residence tax exemption
If you have capital gains from selling your primary residence, the IRS will award you a $250,000 tax-free exemption.
However, there are requirements you need to meet:
- You have not taken this exemption before.
- The home must be your primary residence.
- You must have owned it and lived in it for at least two years.
You may be able to take a partial exemption if you do not meet all the requirements.
What is the capital gains tax rate?
As a single filer, you will have a zero percent capital gains rate if your income is below $40,000. Income between $40,001 and $441,500 will see a 15% capital gains rate and anything more will be 20%.
As for married couples, a joint income of $80,000 or less will result in a zero percent capital gains rate. $80,001 – $496,600 will give you a 15% tax rate and anything more will be 20%.
If you have a short-term capital gain, you will pay ordinary income taxes on it.
Other items to keep in mind
When you put money into home improvements on your property, you may subtract the amount of those improvements from the sale price of your home.
This would decrease the amount being taxed by capital gains.
To qualify, these must be home improvements and not ordinary repairs.
If you have inherited a property, you pay the difference of what the home is worth at the date of the last homeowner’s death and the sale price.
Additionally, if you are a Real Estate investor, you may be able to avoid the capital gains tax with the 1031 Exchange. Read more here.