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.
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.
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.
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.
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.
Taxable part of gain from qualified small business stock sale under section 1202
Collectibles (such as art, coins, comics)
Unrecaptured gain under section 1250 for real property (applies in certain cases where depreciation was previously reported)
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.
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.
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:
Tax rates work slightly differently if you happen to be declaring a short-term capital gain sold by an estate or trust.
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 circumstances, 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.
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.