How Do Capital Gains Taxes Work When Selling a Home?

When Do Sellers Pay Capital Gains Taxes?When people sell a home, they usually hope to get more than they paid. This type of profit is known as capital gains, and it relates to several types of assets that people might have. These gains may or may not be taxable, depending on several factors. With the following information, home sellers will have a better idea of what they can expect will happen to the capital gains from the home sale.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What Are Capital Gains?

Many types of property that people own accumulate value over time. The most common types are real estate, stocks, bonds, precious metals, and jewelry. Ownership of this property is considered an asset. When someone sells an asset, they may gain an amount that is the difference between its purchase and selling price. Of course, sometimes sellers do not gain income from the sale, which might turn into a capital loss. In many cases, capital gains are considered taxable income. There are a few exceptions that homeowners should keep in mind for real estate.

What Are Capital Gains Tax Exclusions?

Home sellers can claim a capital gains tax exclusion up to $250,000, or up to $500,000 for couples who are married filing jointly. The difference is simple to calculate: take the total paid for the property and subtract it from the final sale amount. Any amount under $250,000 or $500,000, depending on the person filing, may be eligible to exclude from taxation. If the capital gains exceed these maximum limits, sellers could have to reconcile a higher taxable income for that year. For most people, the tax rate on capital gains is 15 percent, but it may be more for those in higher income brackets.

Are There Limitations on Capital Gains Tax Exclusions?

There are set requirements that people must meet in order to qualify for the exclusion. Home sellers must be able to prove that they:

  • Owned the home for at least two years
  • Lived in the home as a primary residence for two out of the past five years, even if it is not the same period in which they owned it
  • Have not already claimed an exemption for capital gains taxes in the past two years

Most homeowners who meet these requirements should be able to claim up to the full amount, depending on the total capital gains they have from the sale. Those who do not qualify for the full exclusion might be able to exclude some of it, proportional to the amount of time they lived in the home as a primary residence.

Do Capital Gains Taxes Apply to Vacation or Rental Homes?

Capital gains taxes can apply to vacation or rental homes, and homeowners' ability to exclude those taxes depend on their eligibility to meet the same requirements. For example, a home seller who lived in the home for two years and then rented it out for two years prior to selling may still qualify for the exclusion. Similarly, people who use a property as a primary residence for a few years and then as a vacation home may be able to exclude the capital gains, provided that the two-year period of ownership is still within the previous five years.

Selling a home often comes with profits, and with it the possibility of capital gains taxes. There are exemptions, but sellers must meet the requirements. By researching their options and limitations in advance of the sale, home sellers can be better prepared for their obligations.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

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