Capital Gains Tax On Real Estate & Home Sales (2024)

There are many tax considerations for homeowners. Taxes related to real estate are paid from the time you buy the home all the way through the sale of your property.

Capital gains tax may not be the most exciting part of selling your home, but it’s important to know how it’ll impact your sale. We’re going to teach you a little bit more about the capital gains tax, what it means and how you can reduce your tax burden when you sell your home.

What Is The Capital Gains Tax On Real Estate?

The capital gains tax is what you pay on an asset’s appreciation during the time that you owned it. The amount of the tax depends on your income, your tax filing status and the length of time that you owned the asset.

The capital gains tax can apply to any asset that increases in value. Most people encounter this tax when they sell their primary residence.

How Do Capital Gains Taxes Work?

Let’s start by giving you a feel for how the tax works.

For example, let’s say you bought your home for $150,000 and you sold it for $200,000. Your profit, $50,000 (the difference between the two prices), is your capital gain – and it may be subject to the tax. If you’re selling your primary residence, you may be able to avoid paying the capital gains tax on the first $250,000 gain if you’re a single tax filer and $500,000 for married couples filing jointly.

You only pay the capital gains tax after you sell an asset. Let’s say you bought your home 2 years ago and it’s increased in value by $10,000. You don’t need to pay the tax until you sell the home.

In this example, your home’s purchase price is your cost basis in the property. Let’s expand on that by assuming you spent $50,000 on a kitchen renovation. This is called a capital improvement, so your cost basis is now $200,000. That’s $150,000 (the original purchase price) + $50,000 (the amount spent on the capital improvement). If you sell your home after the renovation for $200,000, your profit is $0, so there’s no capital gains tax.

See What You Qualify For

What Is The Capital Gains Tax Rate?

Your capital gains tax rate will depend on your current tax bracket, the length of time you’ve held the asset and whether the property was your primary residence. We’ll look at that below.

It’s also important to know the type of asset you’re dealing with, because while most long-term capital gains are taxed at rates of up to 20% based on income, there are situations in which higher rates apply.

Special Asset Classes For Long-Term Capital Gains Tax

The following table includes types of assets and their respective capital gains tax rates.

There are special rules that apply for gifts of property or inherited property, patents or certain types of investment income like commodity futures. For tax purposes, these dates are calculated from the day after the original purchase to the date of sale of the property.

Short-Term Vs. Long-Term Capital Gains Tax

When you start to think about selling a capital asset for a gain or a loss, the first thing you need to ask yourself is “When did I buy this?” Capital gains and losses can be short- and long-term, and it’s important to understand the difference between the two.

If you purchased the capital asset less than a year ago, you’re dealing with a short-term capital gain or loss, and it will be treated as ordinary income. If the purchase took place more than a year ago, that’s a long-term capital gain, which will be given preferential tax treatment, and – if it’s your primary residence – it may even be exempted.

However, there are exceptions for property that is a gift or an inheritance.

Short-Term Capital Gains Tax

If you’ve made the determination based on the rules mentioned above that short-term capital gains tax applies in your situation, the profit is taxed at regular income tax rates.

Short-Term Capital Gains Tax Rates For 2023

For the 2023 tax year, these rates are as follows:

Short-Term Capital Gains Tax For Estates Or Trusts

Tax rates work slightly differently if you happen to be declaring a short-term capital gain sold by an estate or trust.

Your home is considered a short-term investment if you own it for less than a year before you sell it. There are no special tax considerations for capital gains made on short-term investments. Instead, the government counts any gain you made on the home as part of your standard income.

This can present a major problem for short-term buyers like house flippers. For example, let’s say you earn a profit of $50,000 from flipping a home within 1 year. Let’s also say that you earn an annual salary of $50,000 from your regular job.

Under these circ*mstances, the $50,000 you earned from the sale of your home essentially doubles your income. When you file your federal taxes, the Internal Revenue Service (IRS) would consider your gross income for that year to be $100,000 and you’d be subject to the same tax rate as an executive that earns $100,000 at your company.

You can minimize your tax burdens with short-term sales by carefully accounting for all of your expenses and deductions.

Long-Term Capital Gains Tax

Owning your home for more than a year means you pay the long-term capital gains tax. After 2 years, you’ll qualify for the personal exemption – more on that below. Unlike the seven short-term federal tax brackets, there are only three capital gains tax brackets.

The long-term capital gains tax rates are much lower than the corresponding tax rates for standard income. You may not need to pay the tax at all if you make less than the minimum amount listed below.

Long-Term Capital Gains Tax Rates For 2023

The percentage you pay on your capital gains depends on your filing status and how much money you made last year.

How To Navigate Capital Gains Taxes On An Investment Property

You can minimize your burden by selling the home strategically if you have an investment property. The capital gains exemption on homes does not have a counterpart in the investment property realm.

Reinvest Sale Proceeds

Many real estate investors engage in 1031 (like-kind) exchanges. In a 1031 exchange, a real estate investor sells their current property but then rolls the proceeds into a new investment opportunity and postpones their capital gains taxes indefinitely.

Another alternative available to longtime real estate investors with large capital gains tax liabilities is to transfer those assets into an opportunity zone. Investors begin to enjoy a step up in basis after 5 years. After 10 years, the gains become tax-free.

Offset Capital Gains With Capital Losses

Just as individual homeowners might choose to sell their home when their income is at a low ebb, businesses should offset capital gains with capital losses. When you sell your asset for less than your adjusted basis, the IRS considers that a capital loss.

Deduct The Costs Incurred By The Sale

You can also deduct any repairs or renovations you made to an investment property to improve the final selling price of the home. Remember to keep documentation such as mortgage statements, bills, deeds of sale, credit card statements and other similar papers to prove how much you spent. These documents will be an asset if you’re audited.

Real Estate Capital Gains Tax FAQs

To learn more about the capital gains tax on real estate properties, review the following frequently asked questions.

How much is capital gains tax on real estate?

The amount you pay in capital gains tax can vary and depends on your income, tax filing status, the amount of time that you’ve owned your property for and whether the house is your primary residence. The amount you end up with as a profit after selling your property is the capital gain that will be taxed.

When do I pay the capital gains tax on real estate?

If you are required to pay capital gains tax, you pay the tax when you sell your property. Be sure to check the IRS requirements for paying the capital gains tax to determine when you have to pay and if you are eligible for an exemption.

How do I avoid the capital gains tax on real estate?

If you have owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.

Visit the IRS website to review additional rules that may help you qualify for the capital gains tax exemption.

Do I have to pay the capital gains tax if I sell a second home or rental property?

Because rental properties and second homes are considered assets, you may be subject to pay the capital gains tax. However, there are also ways to avoid paying the tax on these property types, especially if they’ve increased in value in recent years.

The Bottom Line: Understanding Capital Gains Taxes On Real Estate Is Important

No matter which type of property you decide to sell, take careful note of how much money you spend finding and securing a buyer. From marketing expenses to closing costs paid by the seller (like real estate agent fees), you can deduct these costs from your taxes, though you should speak to a tax advisor for further insight.

Looking for other real estate tax tips? Learn more about the top tax benefits of real estate investing.

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