Capital Gains Tax on Real Estate and Selling Your Home
What is the capital gains tax on real estate?
The IRS charges a capital gains tax on the profits made from selling an investment or asset, such as your home. To calculate, subtract your home’s original cost or purchase price (the “tax basis”), plus any expenses incurred, from the final sale price. Special rates apply for long-term capital gains on assets owned for over a year, which can be 15%, 20%, or 28%, depending on your income.
How much is capital gains tax on a primary residence?
For primary residences, you are not subject to capital gains taxes if your taxable income is $44,625 or less ($89,250 if married and filing jointly). If your income exceeds these amounts, you would pay 15% or 20% on the profit, depending on your income bracket. However, you can exempt up to $250,000 of profit ($500,000 if married and filing jointly) from the tax if you meet certain conditions, such as owning and living in the home for at least two out of the five years before the sale.
How much is capital gains tax on a rental property?
A rental property does not have the same exclusions as a primary residence. You would have to pay a 25% depreciation recapture tax on the portion of your profit from previously claimed depreciation and 0%, 15%, or 20% in long-term capital gains taxes, depending on your income and filing status on the balance.
Avoiding capital gains tax on a home sale
To avoid capital gains tax on a home sale, the IRS offers a few scenarios:
- Primary Residence Exemption: If you have lived in a home as your primary residence for two out of the five years preceding the home’s sale, you can exempt $250,000 in profit ($500,000 if married and filing jointly).
- 1031 Exchange: Selling an investment property and using the proceeds to buy another similar property can defer capital gains tax.
- Opportunity Zones: Investing in designated low-income communities can offer tax advantages.
- Deductions: Qualifying deductions can lower the amount of taxable profit, such as the cost of repairs, improvements, legal fees, and closing costs.
FAQs
1. What qualifies as a primary residence for capital gains tax purposes?
- The property must be your main home where you lived most of the time. Proof includes using the home’s address for official documents and day-to-day needs.
2. How can I establish a rental property as my primary residence?
- Move into the rental for at least two years to convert it into a primary residence. However, you won’t be able to exclude the portion you depreciated while renting the property.
3. Can I avoid capital gains tax if I sell my home because of work or health reasons?
- Yes, the IRS allows exceptions for unforeseen events, such as a change in place of employment, sudden health issues, or becoming disabled.
4. How do I calculate my cost basis in the home?
- The cost basis includes the purchase price plus improvements made over the years. Keeping receipts and documentation of these improvements is crucial for accurate calculation.
By understanding these guidelines and planning your home sale accordingly, you can minimize or avoid capital gains tax, keeping more profit in your pocket.
