What to Know About Capital Gains Tax When You Sell Your Home
For some people, selling their home can affect how much they must pay in taxes at the end of the year; however, not everyone is affected by this tax rule. If you will be selling your home sometime in the near future, there are things you may want to understand about capital gains and how they work. The more you know about this important tax rule and how it affects you, the easier it will be for you to file your taxes at the end of the year.
What Is Capital Gains Tax?
Capital gains tax is a tax applied to the money you make on the sale of an asset. To find out how much you could be taxed on the sale of your home, calculate the difference between how much money you paid for your house and how much money you sold your house for.
If you made money on the sale, then you could be taxed. However, IRS rules exclude some home sales from capital gains, and some homeowners must pay capital gains while others do not.
Who Must Pay Capital Gains Tax?
Not all homeowners must pay capital gains taxes when they sell their home. IRS rules are set up in such a way that people who make a modest profit do not usually have to pay.
- Profits up to $250,000 are excluded from capital gains taxes for individuals.
- Profits up to $500,000 are excluded from capital gains taxes for couples.
Home sellers who believe that they may need to pay capital gains on the sale of their home should consult with an accountant at tax time. A good accountant can help the home seller determine whether they are in fact subject to the capital gains tax rules and how much they will have to pay.
Other Rules Relating to Capital Gains Tax
The IRS has some exceptions to the standard capital gains tax exclusion, so that some people who think they won't have to pay capital gains may have to pay after all. This is another reason why it's important to work with an accountant at tax time when a house was sold the year before. Home sellers are required to pay capital gains tax on all profits if:
- The home they sold was not their primary residence.
- They owned their home for less than two of the previous five years (some people may be excepted from this).
- They didn't live in their house for at least two years of the previous five years.
- They already claimed the exclusion in the sale of a home within the last two years.
- They are subject to the expatriation tax.
For people who are subject to capital gains taxes, the tax rate they must pay depends on how long they owned their home. In general, people who owned their home longer are subject to a lower rate.
Are There Any Ways to Reduce Capital Gains Taxes?
Some home sellers can reduce or may not have to pay capital gains taxes. For example, people who sell their home because of their job, their health or an unforeseeable event in their life may not have to pay capital gains. Additionally, homeowners who keep receipts for home improvement projects may be able to reduce the amount they have to pay in capital gains.
A homeowner who buys their home for $100,000, who makes $100,000 in improvements, and then sells their home for $400,000 after 30 years of ownership will not have to pay capital gains taxes. Although the house sold for $300,000 more than the purchase price, the $100,000 worth in property improvements reduced the capital gains to only $200,000. Homeowners are allowed to make this amount on the sale of their home without paying capital gains.
Homeowners who aren't sure if they'll have to pay capital gains on the sale of their home can consult with an accountant before selling a home. By going over receipts, the accountant can help the homeowner determine how much they can make in profit without paying taxes.
Selling a Home? Contact a Real Estate Professional
If you're selling your home, work with a real estate professional throughout the transaction. Your real estate professional can help you price your home correctly so that your home may sell as quickly as possible.