Capital gains tax on real estate

Key takeaways

• Capital gains tax is the tax you pay on the net profit you’ve made from selling an asset, like stocks, bonds, or real estate. Short-term capital gains are profits on sales of assets you’ve held for less than a year. Long-term capital gains are profits on sales of assets you’ve held for longer than a year.
• If you’re selling your primary residence (the house you’ve owned and lived in for at least two of the last five years), you may qualify for the primary residence exclusion. This allows you to exclude a portion of the profit you made from your home sale.
• Depending on your filing status or income, you may need to pay a long-term capital gains tax rate of 0%, 15%, or 20% on the profits of your home sale.
• From taking advantage of the primary residence exclusion to using a 1031 investment property exchange, there are many ways to save on capital gains tax.
• Whether you’ll have to pay capital gains tax on the profit from your home sale or not, you may need to report it on your tax return.

What is capital gains tax?

When you sell an asset, like stocks, bonds, or even your home, for more than you paid for it, that profit is called a capital gain. Capital gains tax is the tax you pay on that profit.

There are two types of capital gains, short-term and long-term. Short-term capital gains are the profits from selling assets you've held for up to a year and are taxed at the same rate as your ordinary income. Long-term capital gains are the profits from selling assets you've held for longer than a year.

Because long-term capital gains are almost always taxed at a lower rate than short-term capital gains, most of the time, it makes more financial sense to hold onto assets for longer. However, there are, of course, many exceptions to this rule.

Capital gains tax on home sales

When you sell your home, the profit you make might be subject to capital gains tax. However, if you've owned and lived in the home for at least two of the past five years before selling, you may qualify for the primary residence exclusion. This allows you to exclude all, or a portion, of what you make from selling your home.

For 2024, the principal residence exclusion, also called the Section 121 Exclusion, is up to $250,000 for single filers and up to $500,000 for married couples filing jointly. That means that if you’re single and selling your home for a profit of less than $250,000, you won’t have to worry about capital gains tax.

Keep in mind that certain conditions and exceptions apply. If you've used your home for business purposes or rented it out, you may not be able to exclude as much. It’s always a good idea to work with a Tax Pro who can help you maximize your savings in your unique situation.

2024 Long-term capital gains tax rates

If you’re selling a home you’ve owned for longer than a year, what rate will your long-term capital gains be taxed at? That depends on two factors: your filing status and taxable income.

Calculating capital gains tax on a home sale

Calculating capital gains tax on a home sale involves a few steps to determine your taxable gain and any exclusions you may qualify for.

How to calculate capital gains tax on a home sale

1. Determine your basis: This is typically the price at which you bought your home, plus any significant improvements you've made. For example, if you bought your home for $200,000 and spent $50,000 on renovations, your basis would be $250,000.
2. Calculate your sale price: This is the amount you sell your home for, minus selling expenses, like agent commissions and closing costs. If you sold your home for $500,000 and had $30,000 in selling expenses, your sale price would be $470,000.
3. Find your gain: Subtract your basis from your sale price to find your gain. Using the example above, your gain would be $470,000 (sale price) - $250,000 (basis) = $220,000.
4. Adjust for the exclusion: If you qualify for the primary residence exclusion, you can reduce your capital gains tax by up to $250,000 if you’re single (up to $500,000 if you're married and filing jointly). In the example, if you're single or married, you can exclude the entire $220,000 gain, resulting in $0 of taxable gain. If your profit is greater than the exclusion, the amount left over is subject to capital gains tax.

What's the capital gains tax for people over 65?

The capital gains tax rates are the same for people over the age of 65 as they are for younger people. There used to be an exemption for capital gains tax on home sales for people 55 or older. However, that exemption was eliminated back in 1997.

How to avoid capital gains tax on home sale

Is the prospect of having to pay capital gains tax on the profits from your home sale getting you down? You’ll be happy to know that that there are many things you can do to reduce capital gains tax and save you a significant amount of money.

• Principal residence exclusion: If the home you're selling is your primary residence (and has been for at least two of the last five years), you can exclude up to $250,000 of capital gains if you're single, or up to $500,000 if you're married and filing jointly.
• Home improvements: Made any substantial home improvements? Make sure you keep good records. These expenses increase your home's basis and reduce the capital gain. For example, if you added a new roof or renovated the kitchen, you can add these expenses to your original purchase price.
• 1031 exchange: If you're selling an investment property and plan to buy another one, you can use a 1031 like-kind exchange to defer paying capital gains tax.
• Selling costs: Make sure that you deduct any selling expenses, such as real estate agent commissions, advertising fees, and legal costs from your selling price. This reduces the total gain you'll be taxed on.
• Gift the property: In some cases, it may make sense to gift the property to a family member. This can transfer the tax liability to them, and if their tax bracket is lower, it could result in less capital gains tax.
• Offset gains with losses: You can offset the gains from selling your home by selling any investments you have that have lost value.

Do you have to tell IRS when you sell a house?

Yes. You should report your home sale to the IRS if you receive a reporting form. Your closing agent will typically issue Form 1099-S. This reports your home sale to the IRS and lists the sale price and date of the sale.

When you file your taxes, report your home sale on Schedule D, Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets. If you qualify for the primary residence exclusion and it reduces your capital gains tax to $0, you will still need to report the sale if you received a 1099-S.

Make sure that you keep thorough records of the purchase price, any home improvements you’ve made, and the selling costs of your home. These records are necessary to accurately calculate your gain or loss and support your tax return if the IRS has any questions.

Navigating capital gains tax on a home sale can be complex. Unfortunately, missing a home improvement expense or miscalculating your selling costs can result in a higher capital gains tax. Get professional guidance and peace of mind by working with a Jackson Hewitt Tax Pro. Schedule your appointment to get started!

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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