The home seller capital gains tax isn’t very welcome when trying to maximize your return on investment. However, it is a reality some home sellers must deal with to one degree or another. The good news is, not all home sellers will have to pay capital gains tax. But, there are scenarios where it will be a factor. What makes it particularly unappealing is selling a home doesn’t come with costs. Even if you do most of the work yourself, like quick and easy bath updates, refresh the curb appeal, and/or stage it, you’ll incur expenses.
What to Know about Home Seller Capital Gains Tax
The capital gains tax applies to more than selling real estate. It’s applicable to many types of property and possessions. When you sell something of value for a profit, it might be subject to capital gains. The term explains itself — gaining money as profit from a sale. There are a few factors as to how capital gains tax is applied. In addition, not all home sellers will pay capital gains. Although it does apply to several scenarios, it isn’t a straightforward, across-the-board levy.
Capital gains taxes are charged when you sell something that’s increased in value such as an investment like a stock or property. If you held onto the asset for more than a year before you sold it, then you are taxed on a long-term capital gain at a tax rate of 0 percent to 20 percent. —Realtor.com
It really depends on different factors. If you take steps to increase your home’s value, it’s obviously to get a bigger return on your long-term investment. But doing so might just come with more than one catch. Some homeowners make big time improvements, like a room addition or add another story. Ostensibly, this is a good thing because it adds more livable square footage. But, it can easily price a home out of the neighborhood, making it difficult to sell. Regardless of condition, tax implications might be involved. Here’s what to know about the home seller capital gains tax:
- Length of primary residence time. The Internet Revenue Service allows for certain exclusions. Home sellers who meet various requirements do not have to pay the capital gains tax and one such requirement is the length of time the property is your primary residence. It must be two years of the past five years.
- Length of time you’ve owned the home. In addition to the length of time the property is your primary residence, the IRS also requires you to own the home for a period of at least two years. Anything under this amount of time is going to play a big role in the ultimate outcome.
- The amount of profit made from the sale. There are two considerations about the amount of profit you receive as the result of the sale of your house: your marital status and the amount of profit realized. So, a single homeowner is allowed to exclude $250,000, while married couples are able to claim a double exclusion of $500,000. (Couples must file jointly to qualify.)
- Your federal income tax bracket. Depending on your tax bracket, you may or may not have to pay the capital gains tax. If you are in the 10 to 15 percent federal income tax bracket, the rate is zero. However, if you are in the 25 to 35 percent bracket, the rate is 15 percent. Home sellers in the 39.6 percent bracket are subject to a 20 percent capital gains rate.
- Documented home improvements. One piece of good news is documented home improvements which increase value can be subtracted from your home sale profit. For example, if you bought the home in 2010 and paid $250,000, spent $50,000 in home improvements and sell it for $325,000, you can deduct the $50,000 in home improvements.
If you are considering selling your home in Orlando’s Hunter’s Creek, or another community, contact us for the latest market information. We will help get your property ready for sale and create an effective selling strategy.