Understanding Capital Gains When Selling a Home

How Capital Gains Tax Can Impact Your Home SaleThere are many people who are considering putting their home on the market. Those homeowners that are able to sell a residential property at a profit may have to contend with the additional tax of capital gains. While for some, the amount of the capital gains tax can be an unexpected reduction on their profit, there are those who may be able to reduce their obligation.

There is quite a bit to do before homeowners list their home. Understand more about what capital gains tax entails for sellers.

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

Getting Started: Capital Gains Tax

Not everyone thinking of selling their home will have to pay capital gains. This tax is levied on a homeowner who has sold off a home or major asset at a profit. Appreciated primary and secondary homes have been subjected to capital gains.

Before selling a residential home or property, it is helpful for sellers to speak with a tax accountant and understand any taxes due after a sale. At times, individuals may not have to make a full capital gains payment. Different rates of taxation are also dependent on an individual's tax bracket.

Taxpayer Relief and Exemptions

In general, the full amount of the sale of the appreciated property will not be subject to capital gains tax. Those who have never sold a home may be unaware of the Taxpayer Relief Act of 1997. Individuals and couples benefit from the $250,000/$500,000 Exemption. 

Any profit in excess of $250,000/$500,000 would require the payment of capital gains tax. Types of homes that would be subject to capital gains include:

  • Single-family homes
  • Apartments
  • Stock-cooperatives
  • Fixed mobile homes
  • Condominiums

Capital gains tax is paid on homes that have served the owner as a primary residence. Rental and investment properties do not have this tax levied against their sale. A property is considered a primary residence when homeowners make it their residence for at least 2 years within a 5-year timeframe before selling. Knowing these requirements in advance can make it easier for an owner to qualify for an exemption. Both full and partial exemptions may be available for those meeting specified conditions.

After the Sale of a Primary Residence

It can take some time to sell a home. However, the work doesn't end there. Was the home sold at a profit or a loss? One of the seller's responsibilities is to declare any profit from the sale. Depending on how long the owners have resided in the home, the profit will be reported as a short-term or long-term gain. As regulations tend to change, it is best to seek additional information on this point from a reputable tax accountant.

First-time homeowners may be taken by surprise when it comes to declaring a profit and being subject to capital gains tax. Some due diligence can help owners qualify for exemptions to reduce their capital gains obligation.

The $250,000/$500,000 rule is only one way that homeowners may save some of their profit. Understanding the stipulations applying to what deems a property a primary residence can help some people thinking of selling a secondary property as well. Additionally, medical emergencies and unforeseen circumstances that are well-documented may also help individuals and couples benefit from capital gains tax exemptions.

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

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