- Single taxpayers may be able to exclude up to $250,000 in gains on the sale of a home.
- Married taxpayers may be able to exclude up to $500,000 in gains.
- Gains above those amounts are generally taxed at long-term capital gains rates up to 20%.
- This article was reviewed for accuracy and clarity by Lisa Niser, an expert on Personal Finance Insider’s tax review board.
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With overheated real estate markets in many US communities, many taxpayers are selling their principal residence for more than they paid for it.
While this is great, you might owe capital gains taxes on the profit.
How much are capital gains on the sale of a home?
It depends. Section 121 of the tax code grants homeowners an exclusion of up to $250,000 in gains for single taxpayers and up to $500,000 for married taxpayers. You will owe capital gains taxes on any profits from your home sale above these amounts.
To qualify for the exclusion, you have to meet three criteria:
- You have owned the property for at least two of the last five years (the ownership test)
- The property was your primary residence for at least two of the last five years (the use test).
- You cannot have taken the tax exclusion in the past two years.
For example, if a single person bought a condo for $350,000 and sold it for $650,000, their capital gain is $300,000. Their taxable gain is $50,000.
If a couple owns the condo, they don’t have to pay capital gains taxes on their $300,000 profit since it’s less than their $500,000 exclusion.
If you don’t meet the use or ownership tests, you may still qualify for a partial exclusion if you had to sell your home for a health issue, job-related move, or unforeseeable event including divorce or death.
Short-term capital gain
The IRS has two capital gains tax rates based on how long you owned your property. Short-term capital gains tax rates apply to people who have owned their homes for one year or less.
If you sell your home less than 365 days after purchase, any capital gains are taxed at your ordinary income tax rate. The tax rate on the $50,000 gain could be as high as 37%, or $18,500 in taxes.
Long-term capital gain
If you own your home for more than a year, you would pay a long-term capital gains tax rate that tops out at 20% for most taxpayers (an additional 3.8% tax may apply to high earners subject to the net investment income tax). The maximum long-term capital gains tax on $50,000 is $10,000 — a considerable savings compared to the short-term rates.
If you claimed the home office deduction on your home at any point, you may owe tax on a portion of the gain even if it is less than the exclusion amount because the IRS will tax you at 25% on any gain up to the total amount of depreciation taken on the property.
Are capital losses on the sale of a home tax deductible?
No. When you sell your home for less than you paid for it, you can’t write off the loss on your taxes.
What are capital gains?
Capital assets are your property. In addition to your home, your capital assets might include stocks, bonds, cars, or commercial real estate. Capital gains are the profits from the sale of a capital asset.
The capital gain from your home sale is the difference between the sale price less closing costs and the basis. The basis is the amount you paid for your home plus closing costs and capital improvements. The basis for an inherited primary residence is the date of death value.
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