- (949) 510-4818 Capital Gains Tax On A Home Sale
Capital Gains Tax: What Is it, And What Are The Rates On Home Sales?
MAY 11, 2021
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There are many tax considerations for homeowners. Taxes related to real estate are paid from the time you buy the home all the way through the sale of your property.
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. We’re going to teach you a little bit more about the capital gains tax, what it means, and how you can reduce your tax burden when you sell your home.
What Is Capital Gains Tax?
The capital gains tax is a levy you pay when you sell an asset that has increased in value since you bought it. Your capital gains tax rate can be 0%, 15% or 20% depending on your income and your tax filing status. Certain assets are taxed at different rates depending on what they are and the situation.
Almost any property you own is subject to capital gains tax if you sell it for more than the original purchase price. This includes things like furniture and collectibles and investments such as stocks and bonds. It can even include cars, although with rare exceptions for collectible vehicles, that probably wouldn’t come up because most cars are sold at a loss for the original owner. Capital gains tax also applies when it comes to home sales, and that’s what we’ll be talking about for the remainder of this article. Let’s start by giving you a feel for how the tax works.
For example, let’s say you bought your home for $150,000 and you sold it for $180,000. Your profit, $30,000 (the difference between the two selling prices), is your capital gain and it’s subject to the tax.
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.
There are two main types of capital gains: short-term and long-term. Below, we’ll go over the differences between the two.
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What Is The Capital Gains Tax Rate?
There’s no one capital gains tax rate and there are several factors that go into which one applies in your situation.
The first thing you need to figure out is whether you’re dealing with a short- or long-term capital gain. In general, the rule is that if you’ve had the property for less than a year, it’s a short-term gain, and anything after that point is considered long-term. However, there are exceptions were other rules may apply for certain classes of assets, like gifts 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.
The next thing to know is how much income you made the previous year and your filing status because this will determine your tax bracket and the applicable rate.
Finally, it’s important to know the type of asset you’re dealing with, because 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. These assets include:
|Special Asset Classes for Long-Term Capital Gains Tax|
|Asset Type||Capital Gains Tax Rate|
|Taxable part of gain from qualified small business stock sale under section 1202||28%|
|Collectibles (e.g. art, coins, comics)||28%|
|Unrecaptured gain under section 1250 for real property (applies in certain cases where depreciation was previously reported)||25%|
Short-Term Vs. Long-Term Capital Gains Tax
If you do need to pay the capital gains tax, it’s important to know the date you bought and sold the home. This is because there are different tax strategies for long-term and short-term investments.
Short-Term Capital Gains Tax
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 2019 tax year, these rates are as follows:
|Short-Term Capital Gains Tax Rates|
|Tax Rate||Single||Married Filing Jointly and Surviving Spouses||Married Filing Separately||Heads of Household|
|10%||$0 – $9,700||$0 – $19,400||$0 – $9,700||$0 – $13,850|
|12%||$9,701 – $39,475||$19,401 – $78,950||$9,701 – $39,475||$13,851 –$52,850|
|22%||$39,476 – $84,200||$78,951 – $168,400||$39,476 – $84,200||$52,851 – $84,200|
|24%||$84,201 – $160,725||$168,401 – $321,450||$84,201 – $160,725||$84,201 – $160,700|
|32%||$160,725 – $204,100||$321,451 – $408,200||$160,725 – $204,100||$160,701 – $204,100|
|35%||$204,101 – $510,300||$408,201 – $612,350||$204,101 – $306,175||$204,101 – $510,300|
|37%||Over $510,300||Over $612,350||Over $306,175||Over $510,300|
Tax rates work slightly differently if you happen to be declaring a short-term capital gain sold by an estate or trust.
|Short-Term Capital Gains for Estates or Trusts|
|Tax Rate||Estate or Trust Income|
|10%||$0 – $2,600|
|24%||$2,601 – $9,300|
|35%||$9,301 – $12,750|
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 present a major problem for 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. Let’s also say that you earn an annual salary of $50,000 from your regular job. Under these circumstances, the $50,000 you earned from the sale of your home essentially doubles your income. When you file your federal taxes, the IRS would consider your gross income for that year to be $100,000 and you’d be subject to the same tax rate as an executive that earns $100,000 at your company.
You can minimize your tax burdens with short-term sales by carefully accounting for all of your expenses and deductions.
Long-Term Capital Gains Tax
Owning your home for more than a year means you pay the long-term capital gains tax. 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.
|Long-Term Capital Gains Tax Rates|
|Single||$0 – $39,375||$39,376 – $434,550||More than $434,550|
|Married filing jointly and surviving spouse||$0 – $78,750||78,751 – $488,850||More than $488,850|
|Married filing separately||0 – $39,375||$39,376 – $244,425||More than $244,425|
|Head of household||$0 – $52,750||$52,751 – $461,700||More than $461,700|
|Trusts and estates||$0 – $2,650||$2,651 – $12,950||More than $12,950|
How To Avoid Capital Gains Tax On A Home Sale
There are a few ways that you can minimize (or even eliminate) your capital gains tax liability. Use these tips to reduce the amount that you owe.
Tips For Selling A Primary Residence
You need to live in your home for at least 2 years out of the last 5 years to qualify it as a primary residence. The 2 years that you live in your home don’t need to be consecutive. You also don’t need to own your home for at least 5 years in order to claim an exemption from the capital gains tax. For example, if you own your home for 3 years and live in it for 2 years before you sell it, it’s still considered a primary residence. In a case like this, you might not need to pay the capital gains tax when you sell the home.
You don’t need to pay up to $250,000 ($500,000 for married couples filing jointly) in capital gains on your home sale if you meet three conditions:
- You’ve lived in your home for the last 2 years. You can only deduct capital gains on your primary residence. You must have lived in your home for at least 2 years out of the last 5 years before you sell it to qualify for an exemption. The years you’ve lived in the home don’t have to be consecutive.
- You’ve owned your home for at least 2 years. You need to have owned your home for at least 2 years before you can claim an exemption. If you haven’t owned your home for at least 2 years, you’ll pay the much more expensive short-term tax rate.
- You haven’t recently claimed another exemption. Generally, you can’t claim another exemption if you’ve already claimed an exemption during the last 2 years.
If you meet all three criteria above, you can exclude some or all of the capital gains tax when you sell the home.
It’s important to note that this exemption only applies to your primary residence. If you were to sell your second home or investment property to anyone, including a family member you were trying to help out, you would have to pay full capital gains tax.
Tips For Selling An Investment Property
You can minimize your burden by selling the home strategically if you have an investment property that’s not exempt from the capital gains tax. Keeping careful track of how much money you made can help you find the best time to sell your home.
For example, let’s say that you and your spouse earn a combined $80,000 a year. Then, let’s say that your spouse stops working, and as a result your household income drops to $50,000. This would be the ideal time to sell the home because your new income puts you in the 0% bracket for capital gains, thereby eliminating your liability, presuming the property qualified for long-term capital gains tax policy.
Tips For Selling Any Kind Of Real Estate
No matter which type of property you decide to sell, take careful note of how much money you spend finding and securing a buyer. From marketing expenses to closing costs paid by the seller (like real estate agent fees), you can deduct these costs from your taxes.
You can also deduct any repairs or renovations you made to an investment property to improve the final selling price of the home. Remember to keep documentation such as bills, deeds of sale, credit card statements and other similar papers to prove how much you spent. These documents will be an asset if you’re audited.
Summary: Capital Gains Tax On A Home Sale
The capital gains tax is a levy you pay on assets that you sell for more money than you paid for them. You generally pay the short-term capital gains tax if you own your asset for less than a year. The government classifies short-term gains as a part of your standard income. If you own your home for more than a year, you’ll pay reduced rates with the long-term capital gains tax.
There are a number of exemptions that you can use to avoid the tax. You don’t need to pay at all if your income is below the threshold. You also don’t need to pay on up to $250,000 worth of gain when you sell your primary residence. For married couples, that exempt gain doubles to $500,000. It’s a good idea to live in your property strategically and record all of your expenses in order to minimize your tax liability.
The amount you’ll pay in taxes depends on valid deductions, your income and the amount that you sell your asset for. Capital gains tax is just one of many tax considerations you might have in homeownership. There are also tax implications for a cash-out refinance, for example.
Remember, everyone’s financial situation is different and it’s best to speak with a licensed financial expert or advisor before making any major financial decisions.
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Many projects do add value to your home, and improve your family’s quality of life. By working on these projects now, you can enjoy the benefits and updates. If you make green upgrades, then you can also start recouping your investment in these green energy technologies once you complete the projects.
Some home improvement projects that add value to a home include:
1. Remodeling the Kitchen
Most people consider the kitchen to be the heart of the home, and because of this, updates in this room pay off. According to HGTV, you can expect to recoup 60%-120% of your investment on a kitchen remodel, as long as you don’t go overboard. You should never make your kitchen fancier than the rest of the house, or the neighborhood.
Why You Shouldn’t Invest in a Deluxe Kitchen
For example, a historic home in my neighborhood has been on the market for more than two years. During the owner’s last open house, I went in to check it out, and immediately saw why the house hasn’t sold. The quaint Arts and Crafts style home was built in 1900 and has a lot of charm. Unfortunately, the homeowners had invested over $60,000 upgrading the kitchen.
The enormous kitchen, easily the size of the living room, features appliances and countertops that might look more at home in a fancy restaurant kitchen. The style, size, and quality of the kitchen don’t fit in with the rest of the house, or the neighborhood. If you plan on selling your home within the next five years, keep potential buyers in mind before you start on any major remodel; many people won’t pay for a fancy, deluxe kitchen.
A Little Paint Goes a Long Way
When it comes to how much you spend on a kitchen remodel, prices can run the gamut, from $5,000 to $75,000, or more. Get the biggest bang for your buck on a kitchen remodel by looking at color. Fresh paint, in modern colors, can go a long way towards updating the look of your kitchen. Plus, paint is relatively cheap.
You might want to consider using low-VOC paint; this makes your kitchen more eco-friendly, and helps your family avoid breathing in dangerous chemicals, like benzene, that off-gas from regular fresh paint.
Replace old appliances with energy-efficient models. Energy Star-rated appliances are better for the environment, and they also help you save money, because they use less energy. Potential buyers often look for ways to save money when shopping for a new home.
If you’re looking upgrade your appliances to save energy, learn more about the the best time of year to buy large appliances.