Selling a house comes with many costs, and capital gains tax is one of them. However, there’s a silver lining — you can save up to 100% on taxes on selling a house.
The exemption from capital gains tax depends on your marital status, profit amount, and your property’s value.
Before exploring tax-saving strategies, assess your home’s value accurately. The Home Value Estimator below can help. Use it to understand your property’s worth and calculate your taxes confidently.
What Are Capital Gains Taxes?
Capital gains taxes apply to the profit you make from selling your house for more than you acquired. These taxes are subdivided into two categories based on the holding period. A holding period denotes the duration for which you have owned and lived in the property.
Types of Capital Gains Taxes:
- Short-Term Capital Gains: Any profit you gain is taxed as ordinary income if you own the home for one year or less. The STCG gets added to your total taxable income and levied at your regular income tax rate. The regular income tax rate may vary between 10% to 37%.
- Long-Term Capital Gains: If you owned the home for more than a year, you qualify for lower tax rates on the profit. Tax rates in long-term capital gains are typically 0%, 15%, or 20%, based on your taxable income.
How Much Is Capital Gains Tax on Sale of Home?
Tax rates differ based on various filing statuses. The 20% capital gains rate applies to income exceeding the upper threshold for the 15% rate. Refer to the table below to understand tax rates on home sales.
Tax Rate List: Capital Gains Tax on a House
| Tax Rate | Filing Status | Taxable Income Range |
|---|---|---|
| 0% | Single | Up to $44,625 |
| Married Filing Separately | Up to $44,625 | |
| Married Filing Jointly/Surviving Spouse | Up to $89,250 | |
| Head of Household | Up to $59,750 | |
| 15% | Single | $44,625 – $492,300 |
| Married Filing Separately | $44,625 – $276,900 | |
| Married Filing Jointly/Surviving Spouse | $89,250 – $553,850 | |
| Head of Household | $59,750 – $523,050 | |
| 20% | Single | Over $492,300 |
| Married Filing Separately | Over $276,900 | |
| Married Filing Jointly/Surviving Spouse | Over $553,850 | |
| Head of Household | Over $523,050 |
How to Calculate Taxes on Selling a House?
Here’s how you can calculate capital gains tax on home sale:
- Set a Competitive Price: You can fix a price by hiring a professional or by simply using a free home-worth calculator.
- Add Improvement Costs: Find your adjusted basis by adding qualifying improvement costs and closing costs to the original price.
- Calculate Capital Gains: Subtract the adjusted basis from the net selling price — that’s your capital gain.
- Identify the Holding Period: Depending upon the time duration, identify whether you fall under the short-term or long-term capital gains tax rate.
- Check for Exemptions: If you fulfill the eligibility criteria under Section 121, apply the primary residence exclusion.
- Apply the Appropriate Tax Rate: And yay! You have successfully calculated the capital gains. Now, apply the appropriate tax rate from 0%, 15%, and 20%.
Say you want to calculate taxes on a $400K house sale. Assuming that you have owned and been living in for at least 2 of the past 5 years. Also, you are married and filed taxes jointly.
In the above case, you are not liable to pay any taxes.
The exclusion is: $500,000, and your selling price is less than that.
How to Avoid Capital Gains Taxes on Sale of Home?
There are a few ways to avoid or reduce capital gains taxes. If you’re selling your primary residence, you may be eligible for a significant tax break under Section 121. You can claim it only once in two years.
Here’s a closer look at how it works:
Exemption from Capital Gains Tax on Primary Residence
1. Claim Exclusion Limits: Single taxpayers can exclude up to $250,000 of capital gains whereas married couples filing jointly can exclude up to $500,000 of capital gains and save taxes on the sale of real estate/house.
2. Meet Qualifying Criteria: You need to pass through the ownership test and the use test to qualify.
- Ownership Test: You must have owned the home for at least 2 years out of the past 5 years.
- Use Test: The home must be your primary residence for at least two of the past five years before you sell it.
If you sell your home due to unforeseen circumstances like a job change, health issues, or other approved reasons, you may qualify for a partial exclusion.
Exemption from Capital Gains Tax on Investment or Secondary Residence
1. Claim Exclusion Limits: If you use the property for investment (like a rental), you can defer capital gains taxes. This can be done by reinvesting the proceeds into a similar investment property and through a Section 1031 exchange.
2. Convert Into Primary Residence: Convert your second home into your principal residence to be eligible for partial exclusion.
Special Circumstances on Capital Gains Tax
There are certain special circumstances when selling your home where you may still qualify for a partial exclusion. Some key points include divorce, job relocation, health issues, and other unforeseen events.
- You will not be eligible for Section 121 exclusion if you have used the exclusion once within the past two years.
- In case of a separation, a divorcee may qualify for partial exclusion by counting the other spouse’s ownership and residency period.
- You might qualify for a partial exclusion if you move for a new job. This is only possible if the new job is at least 50 miles farther from your old job location.
- You may also be eligible for partial exclusion on primary residence sale tax in case of medical or serious health-related issues.
- Unforeseen events like natural disasters, death, or major job changes can also qualify for partial exclusions.
Bottom Line
Selling a home can come with various tax implications. Understanding the rules and available exclusions can help you keep more of your profit. So, go ahead! Calculate your capital gains, refer to current rates, and SAVE BIG ON TAXES on selling a house!
Also, if your house has not been sold yet, consider listing it on an MLS. A home listed on an MLS sells 17% higher than off of the MLS, which means more money in your pocket again. 🙂
Frequently Asked Questions
How much is the capital gains tax on the sale of personal residence?
The tax rate is 0%, 15% or 20%, depending on various filing statuses. However, you may avoid capital gains tax, if you have owned and lived in the property for at least two out of the past five years.
How do I avoid capital gains tax on sale of personal residence?
To avoid capital gains taxes on home sale, you can utilize the Section 121 exclusion (home sale tax exclusion). Simply show that your home was your primary residence and has been in use for at least two of the last five years before the sale.
You may also reduce taxable gain by adding home improvement expenses to your property’s adjusted basis.
Do I need to pay capital gains taxes if I lose money on a home sale?
No, you don’t have to pay capital gains taxes if you lose money on a home sale. This is because capital gains taxes only apply when you make a profit on the sale.
