Learn What Factors Affect Capital Gains Tax When Selling a Home
Did you make money off the sale of your home? If so, you might have to pay a capital gains tax depending on how much you profited. The exact amount you owe will depend on a variety of factors. In this post, The Aitken Home Team presents six tips on capital gains tax when selling a home.
6 Tips On Capital Gains Tax When Selling a Home
1. How Long Did You Own The Home?
If you owned your home for a period of one year or less upon the closing date of your sales transaction, you’ll likely have to pay short-term capital gains tax. This tax is linked to your specific income tax bracket.
But if you sold your home and owned it for more than one year, you might be faced with long-term capital gains tax. For a long-term capital gains tax, rates range from zero to 20% and tend to be overall lower than short-term capital gains.
Ask your accountant to be sure which tax you qualify for.
2. How Big Was Your Profit?
How much did you profit from the sale of your home? The final asking price doesn’t necessarily matter. Instead, the tax is based on the size of your profit. You won’t be taxed on the full amount of the sale because the IRS has a couple exclusions. For individuals, they can exclude $250,000 of the profit from being taxed. If you’re married, you and your spouse can exclude $500,000.
For example, if you bought a home for $200,000 and sell it for $500,000 in profit, you’ll only be taxed on the $300,000 in profit you made. After you subtract the $250,000 exclusion, this means your capital gains tax will be on $50,000.
This also means that if your profit is $250,000 or below, you may not need to pay a long-term capital gains tax at all.
3. Did You Make Any Renovations?
If you remodeled the home before you sold it, you might be able to close the gap between your purchase price and your selling price with the cost of updates. This means you might be exempt from paying capital gains, or the amount of the tax could be drastically reduced.
Related: “Redfin: Friend or Foe?”
4. What’s Your Marital Status?
The amount of capital gains tax you pay depends on your income bracket and marital status. The rate you pay will increase as your income increases and changes based on your marital status.
5. Is The Home An Investment?
For investors, home sales are considered inventory rather than assets, so all profits are taxable. If you are a house flipper, you likely won’t be able to avoid a capital gains tax.
6. Is The Home Your Primary Residence?
You might be able to avoid capital gains tax if your home was your primary residence and you lived there for at least two years out of a five-year period before the sale. But if the home you sold was a vacation or rental home, you’ll likely have to pay either short or long-term capital gains.