When Do You Pay Capital Gains Tax on Real Estate?

You’ve probably heard that it’s a sellers market right now. There is a shortage of available homes, available right now so the good ones are getting scooped up left and right. Sellers are generally able to get a lot more than the asking price, so it’s a good time to sell your home if you’ve been in it for a while and have seen a lot of appreciation. However, one thing holding some people back is the idea of having to pay taxes. Do you have to pay capital gains tax on real estate? The short answer is that it depends. 

When Do You Have to Pay Real Estate Capital Gains?

The Taxpayer Relief Act of 1997 introduced a law that helps homeowners such as yourself when they sell their home. It essentially made it so most people don’t have to pay a lot of taxes on capital gains after selling when they sell a home. 

For example, if you’re single, the first $250,000 in profit made from the sale of the home does not need to be taxed. However, if you’re married, the number gets bumped up to $500,000. That’s a lot of money and means the vast majority of homes sold do not have to pay capital gains tax. 

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Another nice thing to know is you can add the costs of any major home improvements you made to the home. So let’s say you spent $30,000 upgrading the home and you’re single. That means the first $280,000 ($250,000 + $30,000) in profit doesn’t get taxed!

The only downside about this program is that you can only take advantage of this exemption once every 2 years, which is fine with most people. . For most people that is fine, but just something to keep in mind. 

Capital Gains on Real Estate: Investments vs. Your Main Residence

One thing to note is the Taxpayer Relief Act of 1997 only applies to the home that serves as your primary residence. Most people only own one home, the one they live in, so this requirement doesn’t negatively affect them. This is especially important to keep in mind as you buy a home. If you’re a real estate investor, know that things are a bit different. 

Selling an investment property is always subject to capital gains. You aren’t able to waive off a large chunk of the profits like you can when you sell your primary residence. 

The good news is your capital gains aren’t just based on a simple profit assessment (home selling price – home buying price.) You are also able to include what’s called the cost basis. The cost basis includes

• What you paid for the property
• Costs related to the purchase (ex. Closing costs, legal fees, appraisal fees)
• Costs of major improvements 

This is great for people flipping properties. It means if you put $50,000 into a home, your cost basis is now $50,000 higher. 

How Much is Real Estate Capital Gains Tax? 

The tax rate you pay when you sell any asset – from stocks to real estate – is based partially on how long you held the asset. If you hold it for less than one year, it’s considered a short-term capital gain. If you hold the asset for at least one year, it’s a long-term capital gain. 

The real estate short-term capital gains rates are much higher than long-term. For example, if you are a single person that makes $70,000 per year, your short-term capital gains rate is 22%. If you hold onto the home long enough that it becomes a long-term capital gain, you only pay 15%. 

Again, that doesn’t apply if you meet the requirements of the Taxpayer Relief Act of 1997. In today’s rising housing market where a lot of people are choosing to cash out on their homes, this is handy information. 

Conclusion

Whether you’re an investor or selling your primary residence, the good news is you have ways to minimize your capital gains tax. 

The question is, how are you going to use all of those profits you made on the sale of your home? If you’re looking to buy a home and take advantage of today’s great mortgage rates, let us know! Give us a call at 1-855-644-LOAN or send us an email at [email protected]. We’ll help you put that money to work and buy your dream home. 

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