You obviously want to make money selling your home, but how much? Did you know that if you make too much, you’ll owe capital gains taxes? Fortunately, there are ways to minimize the taxes. See below.
What are Capital Gains in Real Estate?
Capital gains are the difference between the price you bought and sold your home. Let’s say you bought your home for $100,000 and sold it for $200,000. Your capital gains are $100,000. It’s the same practice as capital gains on stocks and bonds, for example.
Getting Around the Capital Gains Tax
The IRS offers several ways around the capital gains tax. In simple terms, single tax filers can exempt the first $250,000 in capital gains. Married filing joint taxpayers can exempt the first $500,000. Sounds perfect, right? There are stipulations, as with most things IRS related.
You must meet the following requirements:
- The home must be your primary residence.
- You must own the home for at least two years within the last five years.
- You must live in the home for at least two of the last five years.
- You can’t have another capital gains exclusion in the last two years.
The Types of Capital Tax Gains
If you don’t qualify for the exclusion for one reason or another, you’ll need to know what capital gains category you fall into:
- Short-term capital gains – If you owned the home for less than one year, it’s a short-term gain. You pay the same tax rate you’d pay on your income.
- Long-term capital gains – If you owned the home for more than one year, it’s a long-term gain. The exact rate you pay depends on your income.
Figuring Home Improvements Into the Calculation
Keep in mind, any home improvements you make help your cost basis. As long as you have receipts, you can add the cost of improvements to the home’s sales price. The higher your cost basis, the lower your capital gains will be. Overall, they help lower your capital gains tax.
Talk with your financial advisor about the best way to manage your capital gains. Most homeowners fall within the exemption the IRS allows. If you don’t, see what other exceptions you can use to help minimize your capital gains taxes.