Aug. 23, 2023
WRITTEN BY ASHLEY SUTPHINPOSTED ONMONDAY, 21 AUGUST 2023 00:00
If you’re selling a home, what you make could be taxable. Depending on your property's value and other factors, you might be hit with a big tax bill that you weren’t expecting.
Capital gains on real estate can be taxed, but there are things you can do to reduce or avoid what you owe to the IRS when you sell your house.
A capital gains tax is the fee you’re responsible for paying on profits you make when you sell an asset. Your capital gains taxes can apply to stocks, bonds, and tangible assets such as cars, boats, and real estate. The IRS and many states also assess the capital gains taxes on the difference between what you’re paying for your asset, known as your cost basis, and what you sell it for.
Capital Gains and Real Estate
The capital gains you might owe if you sell your home vary depending on your tax filing status and the sales price of your home. You may also be eligible for an exclusion. The IRS might allow you to exclude up to $250,000 of capital gains on the sale of real estate if you’re single and up to $500,000 on real estate if you’re married and file jointly.
If any of a certain number of factors are true, you then pay tax on the entire gain of the sale of your home.
These factors include:
The home wasn’t your main residence
You owned the property for fewer than two years in the five years before selling it
Not living in the house for at least two years in the five years before you sold it
You claimed the available exclusion on another home in the two years before selling this current home
Buying the house through a like-kind exchange, which is a 1031 exchange in the past five years
You have to pay expatriate tax
If you do owe taxes on what you made from selling your home, different capital gains tax rates can apply.
Capital Gains Tax Rates
If you owned the asset for a period of less than a year, then typically, short-term capital gains tax rates apply. The rate is the same as your tax bracket. Long-term capital gains tax rates will usually apply if you have owned the asset for more than a year. A lot of people qualify for a 0% rate, but depending on your income and filing status, you might pay 15% or 20%.
Avoiding Capital Gains Taxes When Selling a Home
Some of the things you can avoid having a tax bill from selling your home include:
- The best way to avoid taxes is to live there for at least two years, which don’t have to be consecutive. If you’re a house flipper, you have to be careful here. If you sell a house you didn’t lie in for at least two years, your gains can be taxed. If you sell in less than a year, it’s particularly expensive because you may have to pay the higher short-term tax rate.
- Determine if you qualify for an exception. You might still be able to exclude some of the taxable gains on the sale of your home because of work, health, or an unforeseeable event.
Finally, if you make any improvements, keep your receipts. The cost basis of your home will include what you paid to buy it and the improvements you made over the years. If your cost basis is higher, you may have a lower amount of capital gains taxes to pay. Remodels, expansions, and other updates can reduce your taxes.