Capital Gains Tax On Real Estate And Home Sales: A Guide

As a homeowner, you’ll have to pay taxes related to your property from the time you buy the house all the way through the home sale. One of the taxes you’ll consider when selling your home is the capital gains tax.

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. Let’s take a closer look at the capital gains tax, including 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 type of asset that increases in value. Most people encounter this tax when they sell their primary residence. You may be subject to the capital gains tax if your home’s sale price is more than what you initially paid for it.

You pay the capital gains tax the same year that you sell your house; when you file your tax return.

How Do Capital Gains Taxes Work?

You may be required to pay the capital gains tax on the amount you profit from selling your home. Let’s take a look at an 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.

Capital Gains Tax And Capital Home Improvements

In the above example, your home’s purchase price is your cost basis in the property. Now, let’s assume that you spent $50,000 on a kitchen renovation.

This is considered a capital improvement because the renovation increases the overall value of your home. 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.