When you sell a capital asset, such as real estate, you may have to pay capital gains tax on your profits. This guide explains what capital gains tax is, how much you can expect to pay, and when you have to pay it.
What is Capital Gains Tax?
Capital gains tax is a tax on the profits you make when you sell a capital asset, such as real estate. The amount of tax you owe depends on your tax bracket, the type of asset you sold, and how long you owned the asset.
Short-term capital assets, such as stock held for less than a year, are taxed at your ordinary income tax rate.
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When Do You Pay Capital Gains Tax on Real Estate?
You will owe capital gains tax on the sale of your home if you profit from the sale. It’s payable when you file your federal income tax return for the year in which the sale occurred.
If you sell your home for less than you paid for it, you may be able to deduct your losses from your other income.
How Much Capital Gains Tax Will You Owe on the Sale of Your Home?
The amount of capital gains tax you will owe on the sale of your home depends on your tax bracket and how long you owned the home.
If you owned the home for more than a year, you will owe long-term capital gains tax on your profits. The long-term capital gains tax rate is 0%, 15% or 20%, depending on your tax bracket.
If you owned the home for less than a year, you will owe short-term capital gains tax at your ordinary income tax rate.
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Can You Avoid Paying Capital Gains Tax on Real Estate?
There are a couple of ways to avoid paying capital gains tax on your home.
Selling Your Primary Residence
If you’re selling your primary residence, you may be eligible for the home sale exclusion, which allows you to exclude up to $250,000 of your capital gains from taxation ($500,000 for married couples filing jointly).
To qualify for the home sale exclusion, you must have owned and lived in your home for at least two of the last five years, and you must not have taken the exclusion in the past two years.
You may also be able to avoid paying capital gains tax by rolling your profits over into a new home. This is called a 1031 exchange.
With a 1031 exchange, you can defer paying capital gains tax on your profits by reinvesting them in a new property. To qualify, you must reinvest the full amount of your profits and use the new property for investment or business purposes.
You can also avoid paying capital gains tax by selling your home to a family member.
Related: What to do if your appraisal comes back low
The Capital Gains Tax Breakdown
Here’s a closer look at your potential tax rates:
- Your tax rate is 0 percent on long-term capital gains if you’re a single-filer who earns less than $40,400. If you’re married filing jointly and earn less than $80,800, or if you’re a head of household earning less than $54,100, your tax rate is also 0 percent.
- Your tax rate is 15 percent on long-term capital gains if you’re a single-filer who earns more than $40,400 but less than $441,450. If you’re married filing jointly and earn more than $80,800 but less than $496,600, or if you’re a head of household earning more than $54,100 but less than $469,050, your tax rate is also 15 percent.
- Your tax rate is 20 percent on long-term capital gains if you’re a single-filer who earns more than $441,450 (or $496,600 for married filing jointly or $469,050 for head of household).
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