Understanding Capital Gains When Selling a Home

The Internal Revenue Service (IRS) recognizes capital gains as any profit earned from selling an asset owned for personal or investment purposes. People most frequently encounter capital gains taxes when selling their homes. After selling an asset, a capital gain or capital loss is realized, and there are specific tax implications for each scenario. To make the most of your home sale, it's essential to understand these unique tax laws fully. Keep reading to become an expert on capital gains when selling a home.

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

Determining the Basis of Capital Gains

The term "basis," as it relates to capital gains, is the calculation of what was paid for an asset minus what it sells for. Basis calculations determine the tax liability sellers will be liable for concerning a particular asset.

In many cases, depreciation, neglect, or a poor real estate market may reduce the basis. At the same time, other situations such as building additions and home improvements may increase basis calculations and may be deductible from this estimate. Other deductions from the basis of capital gains include:

• Excise Taxes
• Sales Taxes
• Additional Acquisition Fees
• Costly Repairs

The difference results in a capital gain for homes that sell for an amount higher than the basis calculation. Some may find the sale of their home may be exempt after expenses and depreciation. Any amounts not exempt are taxable. Those who make a considerable profit will need to decide when to sell, as the timing can have explicit repercussions or significant benefits in short-term and long-term gains. Getting a home appraisal can help you predict capital gains.

Capital Gains & Losses When Selling a Home

Just as a capital gain is when an owner sells the home for more profit than the adjusted basis, a capital loss results when the home is sold on less than the adjusted basis. Capital loss declarations are only allowable on investment properties but not homes for personal use. They may be considered a short-term gain or a long-term gain depending on the circumstances.

Those who sell their property that's been owned less than a year will be deemed a short-term gain and pay a higher tax rate. Those who hold onto their home for longer than a year before selling will be taxed at a lower rate as a long-term gain. In cases of capital losses, short and long-term losses are treated the same for tax purposes. Taxpayers may use capital losses above gains to offset their taxable income if they have multiple asset transactions in the same year.

Offsetting Capital Gains With Capital Losses

Other investments and assets such as stocks, properties, or others that sold with a capital loss during the same fiscal tax year may be able to offset short-term and long-term capital gains for IRS purposes. This could ultimately lessen the tax burden if the situation meets specific criteria or tax exclusions. Should financial stocks take a loss on returns or the property has unrealized losses for the foreseeable future, these scenarios could benefit those facing a substantial taxable gain.

Exemptions for Capital Gains Taxes

With the basics covered, there is good news for those seeing sizable capital gains due to the Taxpayer Relief Act of 1997. Single individuals can sell a primary residence with an automatic exemption of capital gains taxes on the first $250,000 of profit.

However, married couples filing taxes jointly enjoy an exemption from paying capital gains taxes on up to $500,000 of profit on a home sold. The kicker is that this type of exemption is only allowable once every two years. Essentially, timing the home's selling and knowing your taxation rates for capital gains can significantly affect the investment's profit.

Master Capital Gains Rules Before Selling Your Home

From staging your home for showings to finding the right buyers, there's a lot that goes into selling your home. Home sellers need to be aware of the potential capital gains taxes they may owe when selling their homes. The good news is that there are exemptions and ways to minimize these taxes and keep more profit. However, it is important to speak with an accountant or tax specialist to understand your specific situation and find the best way forward.

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