Selling your home and finding a new place to live can be exciting—especially if you anticipate making some money in the process. But as anyone who has received a paycheck knows, earning income and paying taxes go hand-in-hand. If you stand to profit from selling your home, you may be subject to the capital gains tax. And if you’re wondering, “What is the capital gains tax?” then you’ve come to the right place.
Factors That Affect Capital Gains Tax
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How Long You Lived There
There are two rates for the capital gains tax: the short-term capital gains rate and the long-term. If you’ve owned your home for one year or less when it sells, those earnings may be subject to the short-term capital gains tax. The short-term tax corresponds to your regular income tax bracket.
If you’ve owned your property for more than a year, your earnings may be subject to the long-term capital gains tax instead. These rates tend to be much lower than the short-term rate—ranging from 0 to 20 percent.
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Amount of Profit
You might think an expensive home will be subject to a higher capital gains tax, but the actual cost of the real estate doesn’t matter. What’s important is how much you profit from the sale. A house purchased for $800,000 and sold for about the same amount could be taxed next to nothing, while a house purchased for $350,000 and sold for $500,000 will rack up a much bigger tax bill.
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Amount You Invest Into Your Home
Did you renovate the kitchen, replace the orange shag carpet or add a pool? It’s always a good idea to keep detailed notes of the improvements you make to any real estate holding, as the money you put into it counts towards the overall cost of your property. This could close the gap between what you paid for the house and its selling price—meaning you could pay less in taxes when it sells.
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Your Income and Marital Status
You don’t pay capital gains tax unless you make a certain amount of income, and the rate you pay increases as your income increases. That “certain amount” is different depending on whether you’re single, married and filing jointly, or married and filing separately.
For example, for 2018, a single person’s long-term capital gains rate is 0 percent if they make $38,600 a year or less. For married people filing jointly, the 0 percent rate goes up to $77,200 in annual income. If that single person brings in between $38,601 and $425,800, they’ll pay a long-term capital gains rate of 15 percent. The married couple’s 15 percent rate will qualify when their income is between $77,201 and $479,000. When both categories of people make more than those income levels, their rate will increase to 20 percent.
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If You’re a Real Estate Investor
If you’re a house-flipper by trade, your sales are considered inventory rather than capital assets, and all gains earned are taxed as income. On top of that, house flippers aren’t allowed to simply avoid the tax by rolling profits over into their next home purchase.
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If It’s a Primary Residence
If your home is your primary residence, you could get a big capital gains break. If you lived in the home for two of the five years prior to the sale, you could exclude sales income up to $250,000 if you’re single and up to $500,000 if you’re married filing jointly.
The flip side is that if you’re selling a vacation home or rental property, you won’t qualify for this exemption. Instead, you’ll be subject to the regular capital gains tax—either the short-term or long-term rate, depending on how long you owned the property.