When Do You Pay Capital Gains Tax on Real Estate?


Everyone wants to make a profit on the sale of a property, but there are expenses that come into play. One such expense is the capital gains tax, which can be substantial if you’re selling real estate at a profit. The amount of the tax depends on how long you’ve owned the property and whether it’s your primary residence or an investment property. You also have to consider if you’re eligible for any exemptions from the capital gains tax. If you’re thinking about buying and selling real estate, knowing when you may have to pay the capital gains tax will help you plan accordingly.

What is Capital Gains?

The IRS taxes the profit you make on real estate as a long-term or short-term capital gain. The tax you owe on the property will depend on how much profit you make, how long you’ve owned it and whether it’s your primary residence or investment property. Long-term capital gains tax rates vary, from 0% to 20%, depending on your income level and filing status. Also read https://www.whiteacreproperties.com/selling-a-house-with-fire-damage-in-massachusetts/

If you’re a single tax filer or married tax filer with low enough income, you can exclude up to $250,000 of your capital gain when you sell your home. If you’ve lived in your house for more than two years out of the past five, you can exclude up to $500,000 of your capital gain. If you’ve been renting your house as an investment property, you can’t use the exclusion until more than two years have passed since you sold your last rental.

When you sell a home, you’ll need to figure out your cost basis. Your cost basis is what you paid for the home and any expenses you’ve incurred that increase the value of the home, like improvement costs. You’ll also need to factor in the sales tax on the purchase and any other fees related to the sale, such as title insurance, real estate agent commissions, appraisal and inspection fees.

You can also include any proceeds from the sale of a personal possession you’ve depreciated, such as furniture or equipment. However, if you depreciated an item on your business and then sold it, you’ll have to pay ordinary income taxes, which are typically higher than capital gains taxes.

The tax rules around investing in real estate can be complicated. If you’re unsure how the rules apply to your situation, talk to a CPA or tax attorney for more information. NerdWallet’s free tax calculators can help you determine how the capital gains tax applies to your investments and what your potential tax bill will be when you sell your property. Get started today.


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