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The Capital Gains Tax and Selling Your Home: The Basics

By Siddharth Mariappan

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Since it’s tax season, it seems timely to take a quick look at a tax that may come into play when selling your home: the Capital Gains tax.

Generally, when you sell a capital asset such as a home or investment for a profit you must pay a capital gains tax on your net gain. Fortunately, though, there is a healthy tax exclusion for the sale of a personal residence. You should work with your tax professional (this summary does not constitute tax advice) to determine whether you will incur a capital gains tax from your home sale, but the general rules are:

  • Single taxpayers can exclude up to $250,000 in gains from the sale of their residence.

  • Taxpayers who file jointly (such as husband and wife) can exclude up to $500,000 in gains from that sale.

  • To claim the exclusion, you must have owned your home for at least 2 years before selling it.

  • To claim the exclusion, you also must have lived in your home as your main residence for at least 2 of the prior 5 years.

  • If you can exclude all of the gain, you do not need to report the house sale on your tax return.

What Is A Capital Gain? Capital gains (or losses) are either long-term (held more than one year) or short-term (one year or less). The IRS defines a gain as “the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.” Determining a net gain for a home sale can be complicated. For example, you would compute not only the amount you paid for the home, but also certain capital improvements made to the home, with adjustments for certain other expenses.

How Much Is The Capital Gains Tax? You will need to talk to your tax professional for specifics, but the capital gains tax rate usually depends on your income. The IRS summarizes the capital gain tax rate this way: “The maximum net capital gain tax rate is 20 %, however for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains.” Again, it’s complicated.

For more about the capital gains tax on home sales, check out IRS summaries on “Sale of Residence-Real Estate Tax Tips” and “Ten Facts That You Should Know About Capital Gains and Losses,” and consult with your tax professional to see how the general rules apply to your specific tax situation.

If you are interested in selling your home, please give me a call at 904-570-1216 or email me at jonkbrooks@gmail.com to set up a free, no-obligation consultation.

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Jon Brooks

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