Trying to sell property that you own can be quite a painstaking process. But when you finally settle on a price, it can be a great feeling when you sell your house for a price much higher than you expected. What most people forget is that the profit that you earn from the sale of your house is taxable. Capital gains refer to any kind of profits that you earn on the sale of your assets. These assets could be anything from stocks and bonds to automobiles, and in this case, real estate. Use Beem to get a quick and accurate estimate of your federal and state taxes and get the maximum refund.
Like all forms of capital gains, capital gains from real estate sales also come with tax deductions. The IRS has different rates depending on your filing status. If you are single, the deduction on capital gains from the sale of a property is $250,000. If you are married and filing taxes jointly, you get a tax deduction of $500,000.
However, these deductions only apply under the following circumstances:
- The property that you sold was your principal residence
- You weren’t living in the house for over two years in the five years prior to the sale
- You owned the property for less than two years in the five years prior to the sale.
- You are an expat and are liable to pay expatriate tax
- You already claimed the tax deduction on another property two years before you sold the current property.
- You bought the house through a 1031 exchange in the last 5 years.
Calculate your tax
The next step is figuring out how much you pay in taxes. This is determined by both the amount of the profit you made from the sale of your house and whether it is a short-term or long-term capital gain.
Short-term capital gains refer to the profits from the sale of a property that was owned for less than a year. As you may already know, short-term capital gains tend to attract a higher rate of tax than long-term capital gains. These tax rates can be as high as 37%. Short-term capital gains are added to your regular income and increase your overall taxable income. To calculate your tax rate, you will have to refer to the tax bracket that would apply to your overall taxable income plus profits from the sale of your house.
Long-term capital gains refer to profits from the sale of a property that was held for more than a year. The tax rate for long-term capital gains is fairly straightforward. More often than not, long-term capital gains for real estate sales don’t attract capital gains tax. In cases where the profits are high, a tax rate of either 15% or 20% is applicable.
Tips to avoid capital gains tax on property sale
- If you’ve renovated the property before you sold it, you may want to hold on to the receipts of all the improvements that were made. You add these expenses to the cost of the property and you can bring down the amount you earn in capital gains, which in turn reduces the amount you are taxed.
- Make sure you live in the property for at least two years before you sell. This way you avoid the higher taxation rate from short-term capital gains.
- If you sold your house because you fell on hard times,(such as losing your job due to the pandemic) you may be eligible for a tax deduction. The details of these deductions are listed in IRS Publication 523.